Bankruptcy is a legal process designed to help individuals and businesses eliminate or repay their debts under the protection of the bankruptcy court. Understanding how to declare bankruptcy and which type suits your situation can be critical in managing overwhelming debt.
While bankruptcy can be a stressful process, it’s important to remember that bankruptcy is not an admission of failure or guilt. Many individuals file for bankruptcy because of unavoidable debts, like medical bills or loans to cover sudden emergency expenses. Bankruptcy is simply the legal acknowledgment of financial insolvency. And with the right advisors on your side, it can be where the path to recovery begins.
The Most Common Types of Bankruptcy
Determining which type of bankruptcy you need to file is one of the first steps in the process. The most common forms of bankruptcy for individuals are chapters 7 and 13, while business most frequently file chapter 11.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy, also known as a fresh start, is intended for individuals (or businesses, in some cases) with no viable way to repay their debts. It allows them to discharge most of their unsecured debts, such as credit card debt and medical bills, providing a fresh start. This is typically the quickest and simplest form of bankruptcy.
Chapter 13 Bankruptcy: Reorganization
Chapter 13 bankruptcy, often called the wage earner’s plan, allows individuals with regular income to develop a repayment plan to pay off all or part of their debts over three to five years.
Chapter 13 is useful for individuals who have a steady income and can afford to repay some of their debts. It helps prevent foreclosure on their homes and allows them to keep valuable assets.
Chapter 11 Bankruptcy: Reorganization for Businesses
Chapter 11 bankruptcy, commonly known as reorganization bankruptcy, is primarily used by businesses. It allows companies to continue operating while they restructure their debts and develop a plan to repay creditors.
The goal is to keep the business alive and pay creditors over time. It provides a chance for businesses to become profitable again while repaying debts.
Other types of Bankruptcy
There are a few types of bankruptcy that, while less common, may be the right filing type depending on the situation. These are typically more specialized forms of bankruptcy that have specific mechanisms to address specific unique challenges.
Chapter 12 Bankruptcy: Family Farmers and Fishermen
Chapter 12 bankruptcy is a specialized form of bankruptcy designed for family farmers and fishermen. It’s like Chapter 13 but provides more flexible terms for repayment.
Chapter 12 helps family farmers and fishermen to propose and carry out a plan to repay all or part of their debts over three to five years while continuing their operations.
Chapter 9 Bankruptcy: Municipalities
Chapter 9 bankruptcy provides financially distressed municipalities, such as cities and towns, with protection from creditors while they develop a plan to adjust their debts.
Chapter 9 allows municipalities to reorganize their debts in a way that allows them to continue providing essential services to their residents.
Chapter 15 Bankruptcy: Cross-Border Insolvency
Chapter 15 deals with cross-border insolvency cases involving debtors, assets, claimants, and other parties from more than one country.
This form of bankruptcy provides effective mechanisms for dealing with insolvency cases with debts (or assets) in multiple countries.
Steps to Declaring Bankruptcy
Now that you have a better idea which type of bankruptcy is the best for your situation, you can begin the steps to filing for bankruptcy.
Assess Your Financial Situation
Determine if bankruptcy is the best option for you. It’s strongly recommended that during this phase you consult with an expert bankruptcy attorney and/or financial consultant.
Credit Counseling
Complete a credit counseling course from an approved agency within 180 days before filing for bankruptcy. This is mandatory and helps you understand your financial situation and explore alternatives to bankruptcy.
File the Petition
Gather necessary documents, including a list of assets, liabilities, income, and expenses, and file a petition with the bankruptcy court. You will need to pay a filing fee or request a fee waiver if you cannot afford it.
Automatic Stay
Once you file, an automatic stay goes into effect, which halts most collection actions against you, including lawsuits, wage garnishments, and collection calls.
Trustee Appointment
A bankruptcy trustee is appointed to oversee your case. In Chapter 7, the trustee will manage the liquidation of assets. In Chapter 13, the trustee will oversee the repayment plan.
Meeting of Creditors
Attend the 341 meeting, where you will answer questions from the trustee and creditors about your financial situation and bankruptcy forms.
Debt Repayment or Discharge
Depending on the type of bankruptcy, you will either repay debts according to a court-approved plan (Chapter 13) or have eligible debts discharged (Chapter 7).
Financial Management Course
Complete a debtor education course before receiving a discharge. This course provides financial management tools to help prevent future financial problems.
Discharge of Debts
If you successfully complete all requirements, the court will discharge your eligible debts, releasing you from liability for those debts.
Declaring bankruptcy is a serious decision with significant implications for your financial future. Understanding the different types of bankruptcy and the process involved can help you make an informed choice. Consulting with a bankruptcy attorney can provide valuable guidance tailored to your specific situation, ensuring you take the right steps towards financial recovery.
