What Are the 6 Types of Bankruptcy?
Most individuals file Chapter 7 or Chapter 13, but there are six types of bankruptcy. Bankruptcy can help individuals and businesses get major debt relief, but there are alternatives.
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- There are six types of bankruptcy.
- Most individuals filing for bankruptcy use Chapter 7 or Chapter 13.
- Most businesses filing for bankruptcy use Chapter 7 or Chapter 11.
- Instead of bankruptcy, you could also try working with a nonprofit credit counseling agency or negotiating your debt.
- Filing for bankruptcy isn’t inherently bad — and it can provide a fresh start if you’re dealing with extreme debt.
Bankruptcy is usually seen as a last resort, but it’s a legal way for people or businesses to get relief from debt. People file for bankruptcy because of divorce, job loss, enormous medical bills or credit card debt, among other reasons. There are also alternatives you may want to consider; see more about those below.
There are six types of bankruptcy. The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. But there are four other types as well: Chapter 9, Chapter 11, Chapter 12 and Chapter 15.
Regardless of which type you file, the process is typically the same: You’ll usually find a bankruptcy attorney and make your case before a judge, who will then erase some of your debts or set you up with a repayment plan.
Also note that a requirement for all bankruptcy types is that you must undergo credit counseling within the 180 days before filing.
Here are the basics about the six types of bankruptcy. For a more exhaustive list of the eligibility requirements for each type of bankruptcy, check out the U.S. Bankruptcy Code.
Chapter 7 bankruptcy
This type of bankruptcy is known as “liquidation” because it wipes out most forms of unsecured debt; it can be used by individuals or corporations. Unsecured debt is collateral-free, meaning that the creditor can’t take property from you unless there’s a judgment
On the other hand, secured debt has collateral you could lose — for example, your car being repossessed if you don’t make loan payments.
Student loan debt can be difficult to have discharged, but it’s not impossible. If you qualify for federal student loan cancellation, it could significantly lighten your debt.
And contrary to what you might hear, you won’t necessarily have to give up all of your assets like your house or car in a Chapter 7 bankruptcy. The types and amounts of assets that are exempt from bankruptcy vary from state to state.
Pros
Relatively quick process (4-6 months).
Unsecured debt like credit cards, personal loans and medical bills can be forgiven.
You may be able to keep your property.
Cons
Remains on your credit for up to 10 years.
Must pass a means test to qualify.
Not all debts can be discharged (like back taxes, child support or student loans).
Who's eligible?
- You pass a "means test" that determines whether you really can’t afford to pay down your debts.
- You haven’t filed for Chapter 7 bankruptcy in the past eight years or for Chapter 13 bankruptcy in the past six years.
- You haven’t had a bankruptcy petition dismissed in the previous 180 days.
Chapter 13 bankruptcy
This type of bankruptcy, also known as a “wage earner’s plan,” reorganizes your debt through a repayment plan that the debtor proposes. Under Chapter 13 bankruptcy, individuals with regular income agree to repay all or some of their debts by paying installments to creditors over three to five years.
Pros
You can keep all your property.
Any co-signers you have are protected.
Stops calls from creditors.
Cons
Stays on your credit for up to seven years.
You must live on a strict budget for the years you repay your debt.
Many cases fail due to missed payments.
Who's eligible?
- You must have enough income to make your payments.
- You can’t have filed for Chapter 13 bankruptcy in the past two years or Chapter 7 bankruptcy in the past four years.
- You must be up to date on filing your taxes.
- Your unsecured debts are less than $526,700 and your secured debts are less than $1,580,125.
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Chapter 11 bankruptcy
Known as “reorganization,” Chapter 11 bankruptcy is typically used by businesses and corporations. It may also be used by people whose debts are higher than the Chapter 13 limits, but that’s more unusual.
Chapter 11 bankruptcy can help a business keep operating while its debts are reorganized and repaid over time.
Who's eligible?
- You cannot have had a bankruptcy petition dismissed in the past 180 days for reasons like failing to comply with court orders or voluntarily dismissing your own filing.
Chapter 9 bankruptcy
This type of bankruptcy applies only to municipalities, such as cities, towns, villages, counties and school districts. The purpose of filing for Chapter 9 bankruptcy is to allow a municipality to reorganize its debts.
Chapter 12 bankruptcy
This type of bankruptcy applies only to "family farmers" and "family fishermen," as defined by U.S. Bankruptcy Code. It can be a cheaper bankruptcy to file than Chapter 11, and it allows family farmers or fishermen who are in financial distress to create a plan to repay their debts.
Chapter 15 bankruptcy
Chapter 15 is the newest type of bankruptcy. Unlike other types of bankruptcy that involve liquidation of assets or debt reorganization, Chapter 15 bankruptcy guides foreign bankruptcy cases that involve assets held in the U.S.
Which type of bankruptcy should you consider?
Individuals who may need to declare bankruptcy are usually choosing between Chapter 7 (which is generally faster and easier to file) and Chapter 13 (which allows you to make payments and possibly keep more assets).
Here are some things to keep in mind when comparing Chapter 7 and Chapter 13 bankruptcy:
You may want to consider Chapter 7 if:
- You’re unemployed with limited assets.
- You’re unemployed but have a lot of equity in your home.
- You need to discharge some debts quickly.
- You want to discharge most of your debts.
You may want to consider Chapter 13 if:
- You have cosigners you want to protect from creditors.
- You want to keep your property.
- You’re behind on some loans and want to catch up.
- You’re experiencing mortgage delinquency or risking foreclosure.
It’s best to work with a bankruptcy attorney to determine which type of bankruptcy is right for you and your situation.
Is it bad to file for bankruptcy?
Although bankruptcy can be an expensive and complicated option, it can also help give you a fresh start as you work on achieving financial wellness, and it can serve as a learning opportunity.
“Bankruptcy isn’t inherently a bad thing, but it can be if you don’t learn from it,” says Jay Zigmont, a certified financial planner and the author of the book “Portraits of Childfree Wealth.”
He notes that it’s important to focus on improving your behaviors around money after filing for bankruptcy to avoid it in the future.
And while there are some potential benefits to filing for bankruptcy, don’t look to it as a quick fix for severe financial problems.
Experts like financial coaches and financial therapists can help you to address your financial behaviors.
And while there are some potential benefits to filing for bankruptcy, don’t look to it as a quick fix for severe financial problems.
Experts like financial coaches and financial therapists can help you to address your financial behaviors.
Alternatives to filing for bankruptcy
When it feels like there’s no way out of exorbitant debt, bankruptcy may seem like the only option. Here are some alternatives to consider before you look to bankruptcy for debt relief:
Work with a nonprofit financial service
If you’re considering bankruptcy, you might not have money to hire a financial advisor or coach, but nonprofit credit counseling agencies may be able to give some valuable and free or low-cost advice.
“Before you go down the bankruptcy path, I encourage people to work with a financial planner, a financial coach or even a nonprofit service to first help with trying to tackle the debt on your own,” Zigmont says.
Negotiate your debt
You may be able to lower your debt or set up a payment plan by reaching out to debt collection agencies or other parties that you owe.
“For example, for medical debt you may be able to work with a hospital in order to receive charity care or financial aid, or work with them to get set up with a payment plan,” Zigmont adds. Charity care or financial aid may allow you to receive free or low-cost medical care.
Increase your income
It can’t hurt to look for ways to boost your income as you try to tackle your debt. Take on a second job if you’re able to or look for small ways to bring in extra money.
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