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The Most Common Types of Bankruptcies Explained


what type of bankruptcy is chapter 7

If you’re seeking a fresh financial start, you may be wondering which type of bankruptcy is right for you. The answer depends on your current finances and your expectations for the future. 

You should understand how bankruptcies work before deciding whether to file for one. Below is an outline of each type of bankruptcy to help you determine which one applies to you.

Overview of Bankruptcy 

Bankruptcy is a legal procedure used to get debt relief. The bankruptcy rules of the United States provide for various sorts of bankruptcy, depending on the type of filer. The most frequently used distinction is between individuals and corporations, or personal and corporate bankruptcy.

Each chapter of the Bankruptcy Code is associated with a certain sort of bankruptcy. The United States Bankruptcy Code is the federal legislation that governs bankruptcy proceedings. Since it is federal, it is uniform throughout the United States, and the bankruptcy court is a federal court. A Towson Maryland bankruptcy law firm can help you with more information.  

Consider the different types of bankruptcy.

Under the United States Bankruptcy Code, there are six distinct categories of bankruptcy. Each of them is called after the a chapter. Thus, we have:

  1. Chapter 7 (liquidation),
  2. Chapter 9 (adjustment of municipal debts),
  3. Chapter 11 (reorganization)
  4. Chapter 12 (adjustment of debts of a family farmer or fisherman with a regular annual income)
  5. Chapter 13 (adjustment of debts of an individual with a regular income), and 
  6. Chapter 15 (ancillary and other cross-border cases). 

These chapters apply to a variety of situations and entities. The most often used bankruptcy chapters are Chapter 7 and Chapter 13 for individuals and Chapter 7 or Chapter 11 for businesses.

However, in this post, we’re going to highlight only the most common types of bankruptcy.

Chapter 7 Bankruptcy Explained

What type of bankruptcy is chapter 7?

Chapter 7 is often referred to as a “liquidation bankruptcy” because the law demands that some property be liquidated to satisfy unsecured creditors in return for a fresh start. The sale (liquidation) is overseen by a bankruptcy trustee.

The trustee may sell only property that is not exempt from taxation (called non-exempt property). If all of your properties are exempt, the trustee cannot sell them. In this instance, your creditors receive nothing, and you retain all of your property.

In most personal Chapter 7 bankruptcy cases, all assets are protected by state law. If no non-exempt property is involved, most personal Chapter 7 bankruptcy cases are completed within four to six months. 

The bankruptcy discharge – the court judgment that cancels your dischargeable debt – is typically issued about three to four months after filing. As soon as that occurs, you may begin repairing your credit.

Chapter 13 Bankruptcy Explained

This is the second most prevalent kind of personal bankruptcy. Unlike Chapter 7, companies (other than sole proprietorships) are not permitted to petition for bankruptcy under Chapter 13. 

The term “reorganization” refers to a repayment plan that often pays just a part of the filer’s entire debt. To petition Chapter 13, you must have a specified amount of secured and unsecured debt (including personal loans).

Chapter 11 Bankruptcy Explained

Bankruptcy under Chapter 11 is frequently used to reorganize a business or organization. Businesses design a strategy for maintaining operations while repaying their debt, which the court and the creditors must approve.

Certain individuals, such as real estate investors, who have an excessive amount of debt and a large number of high-value properties and assets, may also decide to file under Chapter 11.

Except if you’re a professional athlete or a celebrity, though, you are unlikely to mess with this one.

Understand the benefits of each chapter

Bankruptcy Chapter 7

  • Debt forgiveness – Chapter 7 bankruptcy allows you to repay creditors fast or eliminate a large portion of your debt.
  • Creditor harassment is stopped — When you file for bankruptcy, the judge will impose an automatic stay on creditors, compelling them to refrain from contacting you or repossessing your property.
  • Exemptions for residential and personal property – Chapter 7 bankruptcy does not require you to liquidate all of your assets. The legislation has exclusions that allow you to keep the most important items to you.
  • Recover credit score – While Chapter 7 bankruptcy does have a negative impact on your credit score, you may gradually rebuild it over time.
  • Assistance with your house — If you’re falling behind on your home mortgage payments, you can reclaim part of your living space by filing for Chapter 7 bankruptcy.
  • Chapter 7 bankruptcy may be an efficient strategy to resolve an automobile loan.

Bankruptcy Chapter 13

A Bankruptcy chapter 13 is a 3-5 year payment plan. The duration of the repayment plan may discourage some people, making Chapter 7 bankruptcy appear more appealing. However, a Chapter 13 bankruptcy may be the best option for your financial health in the long run.

Among the benefits of Chapter 13 bankruptcy are:

  • Allowing you to pay only what you can afford
  • Discharge debts that you are unable to pay in full
  • Saving your home from going into foreclosure 
  • Avoiding the need for a second or bigger mortgage

Bankruptcy Chapter 11

Among the benefits of Chapter 11:

  • An extension of payment periods on real estate mortgages or equipment loans is possible under the concept.
  • Unless the court adopts a plan without creditor consensus in Chapter 11, the debt discharge occurs at plan confirmation (approval) rather than plan completion.
  • Debtors do not have to provide a trustee with their disposable income. The “debtor in possession” controls the company.
  • Trustees appointed to supervise cases under Chapter 11 are frequently appointed due to severe negligence or fraud.

Make the correct choice: Talk to a Towson Maryland Bankruptcy Attorney. 

Bankruptcy is not a move that should be taken lightly. It will have a significant negative influence on your finances, credit score, and future. Before declaring bankruptcy, you should carefully consider all of your choices and consider the long term effects bankruptcy may have on your life. 

If you are facing bankruptcy, you should consult with a competent Maryland Bankruptcy Attorney. Call us today at (410) 505-0414.

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