How to Handle Bankruptcy

Understanding the Four Chapters of Bankruptcy

If you have trouble paying off your debts, bankruptcy is one of the options that you may have to consider. Bankruptcy enables you to eliminate your debts and give your financial life a whole new beginning. Before you decide to file for bankruptcy, it is important that you learn more about the legal aspect of the process. There are different types of bankruptcy, and each of them is managed in accordance to one of the four chapters of bankruptcy. It is important that you find out which chapter applies to your bankruptcy case, so that you will know what to expect when you are going bankrupt.

Chapter 7

Chapter 7 bankruptcy is also referred to as liquidation bankruptcy, and it is the most common form of bankruptcy. In Chapter 7 bankruptcy, a trustee will be appointed to collect all the debtor’s non-exempt assets, and he or she will sell them and divide the proceeds among the creditors. Debts for exempt assets will be discharged. The federal and state governments have different criteria for determining exempt and non-exempt assets, and the regulations of the states may prevail over those of the federal government. Chapter 7 cannot be applied to eliminate recent taxes, student loans, child support, alimony, criminal fines, drunk-driving fines, and debts that involve fraud or intentional misconduct.

Chapter 11

Chapter 11 is a proceeding that requires businesses and corporations to propose a reorganization plan to their creditors. Depending on the decision of the court and the creditors, the business that is in debt may be able to retain possession of its assets and continue operating. The creditors will vote on the reorganization plan that is suggested by the debtor, and the plan will become binding if it is accepted by the majority of the creditors. The plan can come in the form of repayment with future income or proceeds from sales of assets.

Chapter 12

The Chapter 12 proceeding applies to family farmers, and it also involves a reorganization proposal. According to this chapter, debtors are allowed to retain all their assets, but they have to pay their creditors with the incomes they earn in the future.

Chapter 13

Chapter 13 bankruptcy is another type of bankruptcy that is commonly filed. It is a repayment plan that applies to individuals and business owners who have an unsecured debt of less than $360,475 or a secured debt not exceeding $1,081,400. Those who file for Chapter 13 bankruptcy can keep all their assets, but they are required to make regular payments to a trustee, who will in turn pay off creditors. The duration of the repayment can range from three to five years. Depending on the income of the debtor and the amount and type of debt, the repayment can be 10% to 100% of the total amount owed. Chapter 13 filers with secured debts have to continue to make regular payments to their creditors outside the repayment plan. Chapter 13 can be used to discharge some types of debts that are not dischargeable in Chapter 7, including recent debts, debts from fraud, and criminal fines, and it can help prevent foreclosures and repossessions as well.

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