In 2016, John Oliver, host of Last Week Tonight, did a piece on debt collectors, who admitted to waking up the neighbors, calling a debtor’s boss, and impersonating federal agents, all to collect. That’s in addition to the countless lawsuits debt collection agencies file.
If you have serious debt, it can hang over your whole life, but you have options. One of them is declaring bankruptcy. But before you file, you need to understand the different types of bankruptcies. Then, you’ll be able to decide which is right for you.
Different Types of Bankruptcies
Of the six different types of bankruptcies, you’ll probably only be dealing with the three most common: Chapter 7, Chapter 11, and Chapter 13. However, three other bankruptcy types may be relevant to your situation, so we’ll discuss them briefly first
Chapter 12: Family Farmers and Fishermen
Chapter 12 bankruptcy is mostly for small farmers and independent fishermen. It’s a way for them to restructure their finances to avoid foreclosure or completely selling their assets. Very few people qualify, but the protections are useful if you are in this specific category.
Chapter 15: International Debtors
Chapter 15 bankruptcy is for foreign individuals or companies to file for bankruptcy in the United States when they have assets in more than one country. Often, this U.S. filing goes along with a primary filing in the debtor’s home country. Mostly, Chapter 15 helps courts in different countries to coordinate.
Chapter 9: Municipalities
Under Chapter 9, municipalities (cities, towns, villages, counties, or school districts) can reorganize their debts when facing financial trouble. It protects municipalities from their creditors to give them enough time to develop a plan for settling or negotiating their debts.
The Most Common Types of Bankruptcies
Typically, you’ll be dealing with Chapter 7, Chapter 11, or Chapter 13. Your choice depends on whether you are filing as an individual (Chapters 7 and 13) or as a business or corporation (Chapter 11). A bankruptcy attorney can help you decide which of the three is right for your situation.
Chapter 7: Liquidation
Chapter 7 is the most common type of bankruptcy for individuals. The courts will appoint a trustee who will oversee the liquidation or sale of your assets to pay off your creditors. Your remaining unsecured debt is typically erased, although that does not include student loans.
You can only file for Chapter 7 if the court decides your income is not high enough to pay off your debts. After you file for Chapter 7, it will stay on your credit report for 10 years, and you cannot file it again for another 8 years.
Chapter 13: Wage Earner’s Plan
If your income is high enough to pay off your debts, you can choose Chapter 13, or a wage earner’s plan, instead. Under this type of bankruptcy, a person with a regular income can propose a payment plan to pay back their creditors over the next three to five years. Using Chapter 13, you can stop foreclosure proceedings (which Chapter 7 can only delay), extend secured debts over the length of the repayment plan, and protect co-signers.
Mostly, Chapter 13 helps individuals (not businesses) who cannot pay immediately, not people without the means to pay at all. But, there are limits to how much debt can be reorganized this way, and a court trustee gets to oversee all your spending during the plan.
Chapter 11: Reorganization of Businesses and Corporations
Under Chapter 11, businesses develop a plan, which both the court and their creditors must approve, for keeping the company running while still paying off their creditors. So, while the debtor continues to run the business, the court must agree with certain decisions, like selling assets or expanding.
Typically Chapter 11 cases are the most complex and expensive bankruptcy cases. For this reason, while certain extremely high-wealth individuals may opt for it, such cases are very rare.
Ask an Expert and Choose Carefully
Different types of bankruptcies can help give you a fresh start when faced with insurmountable debt, but you need to consider all your options before you rush into anything. The process is complex and will take years, so it’s a good idea to look for professional help before you decide.
While you’re planning, take a look at some of our other posts on dealing with debt collectors and tips for debt recovery. There are other things you can do before or beyond declaring bankruptcy.