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Bankruptcy Basics: The Three Most Common Types of Bankruptcy

Bankruptcy Basics: The Three Most Common Types of Bankruptcy

When times get tough, sometimes people have to search for answers that they’d never consider during their more flush financial moments. Bankruptcy is one of those last-ditch efforts many people make to keep their heads above water. However, many people don’t understand that there are multiple kinds of bankruptcy for which they can file and not every one applies to them.

Three of the six types of bankruptcy are less common and probably don’t apply to most people. For instance, Chapter 12 bankruptcy is only for family farmers.  Foreign cases file for bankruptcy under Chapter 15, and Chapter 9 bankruptcy is reserved for a municipality. The other three types, including Chapter 7, Chapter 13, and Chapter 11, are more likely to apply to the general public.

Chapter 7

Called the liquidation bankruptcy, Chapter 7 is one that varies widely by state because of variations in laws. For example, in Florida, your primary home cannot be liquidated for bankruptcy because of a regulation that exempts your home from the list of assets that can be liquidated. However, if you file for bankruptcy in Michigan, you’ll need to check the exemption list carefully before you’ll know if you can lose your home.

In short, everything you own that’s not on the exemption list can be taken and sold to pay your creditors in the event of a Chapter 7 bankruptcy filing. You may get lucky, though. If everything you own is on that list, then you file and your creditors get nothing. However, most people fall somewhere in the middle.

Chapter 13

A Chapter 13 filing, the reorganization bankruptcy, is the second most common type of case filed, Chapter 7 being the most common. With a Chapter 13 case, you reorganize your debt and agree to pay only a portion of it back. Essentially, you tell the courts what your monthly budget is and how much you can afford to pay back according to that budget.

It sounds simple, but you can’t just jot down a bunch of numbers on the back of a napkin and expect that to suffice. You’ll need documentation of everything you make and owe, both secured and unsecured debt. The catch is, you can only file for Chapter 13 if your total debt doesn’t exceed a certain amount. Again, check your state laws to discover what the variables are.

Chapter 11

Chapter 11 bankruptcy is often used when a business needs more time to rethink its future strategy and wants to remain open while filing for bankruptcy. A new contract can be made which allows the debtor to create a new financial plan agreed upon by the court and creditor.

However, this type of bankruptcy is often the most expensive. Court fees are, on average, $2,000 for a filing, depending on the state. Attorney’s fees usually start about $15,000 for Chapter 11.

If you’re using Chapter 11 as your filing, it means you’re either an individual who earns a lot and has a lot of debt or you’re filing as a business.

Before you file for any kind of bankruptcy, you should definitely consult a lawyer who specializes in it.

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by Dirk DeBie // Contributor to Businessing Magazine.

Opinions expressed by contributors are their own.