Here are details of the types of bankruptcies. You’re sitting at the kitchen table, staring at collection notices and figuring out how to make it all work. Perhaps you’ve recently lost your work, and your debt has grown unmanageable. Then it occurs to you—that term you never imagined you’d have to consider: bankruptcy.
When your position appears hopeless, bankruptcy may appear your only option. We understand that you may feel afraid and trapped, but bankruptcy is not a choice to be taken lightly. It’s critical to understand what bankruptcy is and the many types to make the best option for your circumstances.
What Is Bankruptcy?
In real life, bankruptcy is a lot more severe than just a method to lose a game of Monopoly: It occurs when you appear before a judge and inform them that you cannot bill. Then, depending on the circumstances, they either cancel your debts or devise a repayment plan for you. People file for bankruptcy for various reasons, including job loss, divorce, medical emergencies, and family deaths. In reality, in 2018, almost 730,000 nonbusiness bankruptcies were filed. 1. That’s insane!
However, bankruptcy is a serious life event that has ramifications beyond your pocketbook. It can track you down while applying for jobs, buying a house, or starting a business. Even though it may appear to be a “new beginning,” bankruptcy addresses the symptoms, not the underlying problem.
Before going for such a big decision we recommend you consult with your Business Lawyer about any of the possible outcomes.
Student loans, government obligations (taxes, fines, or penalties), reaffirmed debt (when you commit to the terms of a current loan), child support, and alimony are all excluded from bankruptcy. If those are your sole debts, bankruptcy is not an option.
Going through real-time example a Crypto Hedging platform Three Arrows Capital filed a bankruptcy.
Types of Bankruptcies
There are five categories of bankruptcy under the United States Bankruptcy Code for debts owed in the United States (The sixth chapter, Chapter 15, deals with debt that spans multiple countries). Each one applies to a particular type of debtor. Each chapter has its aim, ranging from asset sales to debt restructuring.
Individuals or businesses can give up nonexempt assets and walk out the door from most debts under Chapter 7, often known as liquidation. Debtors must pass the means test, which requires them to earn less than the state’s median income. Not all debts can be discharged, and discharge in Chapter 7 bankruptcy is not automatic. Individuals who properly discharge eligible debt are released from liability.
This clause permits towns to restructure their debt. Whether a school, city, district or county is experiencing financial difficulties, Chapter 9 bankruptcy allows them to restructure their debt and formulate a strategy without liquidating their assets. Municipalities that apply for Chapter 9 might reorganize debts by lowering existing debt interest rates, reducing principal amounts, extending payback terms, or refinancing.
Chapter 11 bankruptcy, sometimes known as reorganisation, allows people — and, more typically, organizations — to restructure debt. With this method, you can keep your assets while repaying some of your debts.
Because the firm is considered separate from the shareholders, corporations entering Chapter 11 bankruptcy do not risk putting their assets in jeopardy. Because the owner and debtor in a sole proprietorship business are the same people, both personal and commercial assets are examined in a Chapter 11 filing. Chapter 11 is far more complicated and, as a result, more expensive, making it only financially viable for enterprises and the very affluent.
Family farmers and fishers with consistent income might arrange their debts under Chapter 12. However, unlike Chapter 13, this solution is preferable for farmers with larger debts and does not fall under the Chapter 13 wage-earner category. As a bonus, it’s less time-consuming and intricate than Chapter 11. Repayment is usually spread out over three years, although a court might decide to prolong the repayment period up to five years if it deems it necessary.
The debtor’s debt is forgiven once they have completed all payments under the reorganization plan. Chapter 12 bankruptcy does not discharge some debts, such as child support or alimony.
Individuals who need to restructure their debts can use Chapter 13, similar to Chapter 11. A portion of the debt will be repaid to some creditors, plus interest. The repayment duration is typically three to five years.
This sort of bankruptcy necessitates debtors having a steady source of income, and debt thresholds limit eligibility. This filing requires unsecured debts to be less than $394,725 and secured debts to be less than $1,184,200. As a benefit of Chapter 13 bankruptcy, the debtor’s home will not be at risk of foreclosure during these proceedings.
What should debtors do?
There are a few options available if your debt is unmanageable. These are some of the choices:
Directly negotiating with creditors: Creditors would like to receive some of the money they owe rather than very little (as in the case of Chapter 7 bankruptcy). Make your financial circumstances clear to them, and see if they’re prepared to work with you on a repayment schedule, debt reduction, or other solution.
Counselling on credit: A nonprofit credit counselling agency can assist you if you require additional assistance. They’ll help you in terminating collection calls and developing an appropriate debt management strategy for your financial condition.
Bankruptcy: If you’ve spent all other options for financial relief, bankruptcy may be a possibility. This method has long-term consequences for your credit, perhaps affecting your score for seven to ten years.
Bankruptcy is a complicated procedure, so you should seek legal advice if you believe it’s your best option. You must get credit counselling from an accredited provider within 180 days of declaring bankruptcy, regardless of which bankruptcy chapter you choose. Remember that bankruptcy does not eradicate all of your debts, so this decision does not guarantee that you will be debt-free. Before making this life-altering decision, ensure you are counselled by an unbiased bankruptcy or credit professional.