Six Types of Bankruptcy: Which One is Best for Your Situation?

The US Bankruptcy Code offers a range of bankruptcy types for individuals, businesses and other entities. It’s crucial to choose the type that works for you.

If you or your business face insurmountable debt, bankruptcy can represent relief, and offer a path to a fresh start financially. The US Bankruptcy Code outlines six types of bankruptcy, all of which are named after sections of the code: Chapter 7, 9, 11, 12, 13 and 15.

Common bankruptcy types

The most common types of bankruptcies are Chapters 7, 13, and 11. All of these are available to a wide range of individuals and businesses, and they each have specific requirements.

Chapter 7 bankruptcy

Also known as “liquidation” or “straight” bankruptcy, a Chapter 7 bankruptcy filing lets individuals, partnerships, and corporations discharge or eliminate most of their debts and get a fresh start.

In Chapter 7 bankruptcy, a court appoints a trustee to sell or liquidate your assets, then uses the proceeds to help repay creditors. Certain exemptions let you protect certain types of property from being sold to satisfy their debts. Once the liquidation process is complete, you are discharged from most of your remaining debts—in other words, you’re no longer legally obligated to repay them.

To qualify for a Chapter 7 bankruptcy, you must pass a means test that compares your income to the median income in your state. Chapter 7 bankruptcy is often quicker and less costly to file than other bankruptcy types because it doesn’t require a repayment plan.

Keep in mind that you cannot discharge every type of debt in Chapter 7 bankruptcy. Debt types that you can’t discharge include alimony, child support, student loans (unless you can prove undue hardship), and certain kinds of tax debts.

Filing for Chapter 7 bankruptcy may affect your credit score for up to 10 years, which could impact your long-term financial future. On the plus side, Chapter 7 bankruptcy lets you eliminate overwhelming debt and start anew. It’s critical to consult with a qualified bankruptcy attorney to understand the implications of Chapter 7 bankruptcy and determine if it’s the right option for your financial situation.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is also known as “wage earner’s” bankruptcy or “reorganization” bankruptcy. If you earn a regular income, it enables you to repay creditors over three to five years while retaining your assets and avoiding liquidation.

A Chapter 13 filing requires you to offer a repayment plan to the court that details how you’ll use your income to repay your debts while you maintain your regular living expenses. Typically during a Chapter 13 bankruptcy, you work with a bankruptcy trustee to create a viable plan for making regular payments to the trustee, who then distributes the payments to creditors. A Chapter 13 bankruptcy may stay on your credit report for up to seven years from filing.

One major advantage of Chapter 13 bankruptcy is that you can retain assets like your home or car during your repayment process, and prevent foreclosure or repossession. Also, Chapter 13 enables a stay on collection efforts—such as lawsuits or wage garnishments—which can afford you breathing room to repay your debts.

Because a Chapter 13 requires strict adherence to your repayment plan and other legal requirements, it can pay off to hire a qualified bankruptcy attorney to help you navigate the process successfully.

Chapter 11 bankruptcy

Chapter 11 bankruptcy is also known as “reorganization” bankruptcy. It was created so that you can keep your business operating while you restructure your debts, develop a repayment plan, and reach financial stability.

In a Chapter 11 bankruptcy, your business can continue operating as a “debtor in possession.” That means you retain control of your business assets and operations while you work on a plan to reorganize their debts. Filing the bankruptcy allows a stay or halt on collection efforts like lawsuits or foreclosures, which gives you time to negotiate with creditors and fully configure your debt repayment plan.

Your repayment plan may also involve reducing or restructuring the debt, selling assets, or getting new financing. The plan you create for your business in a Chapter 11 bankruptcy must be approved by the bankruptcy court and your creditors before it can be implemented.

Chapter 11 bankruptcy involves stringent reporting requirements and court oversight, and may require changes to your business operations. Because it’s such a complex and costly process, it’s best to have an experienced bankruptcy attorney in your corner.

Other bankruptcy types

Unlike the above bankruptcy types, Chapter 9, 12, and 15 bankruptcies provide protections for specific cases and situations.

Chapter 9 bankruptcy

Chapter 9 bankruptcy enables municipalities—for example cities, counties, townships, or school districts—to stay operational while they reorganize and repay their debts. This bankruptcy type helps put a stay on lawsuits or foreclosures that a municipality may face, giving it time to negotiate with creditors and create a debt restructuring plan.

Chapter 9 bankruptcy is a complicated legal process with unique rules and requirements. Typically, municipalities that file need experienced bankruptcy attorneys to help navigate the process towards a successful debt restructuring.

Chapter 12 bankruptcy

Chapter 12 bankruptcy is also known as a “family farmer” or “family fisherman” bankruptcy. It’s designed to enable US-based family-owned-and operated farmers and fishing businesses restructure their debts. Family farmers and fishermen that get their Chapter 12 bankruptcy approved are allowed to operate their businesses while repaying creditors. A Chapter 12 can also offer more favorable repayment terms and flexibility in dealing with agricultural or fishing-related debts.

Courts that help enact Chapter 12 bankruptcy recognize the unique nature of agricultural and fishing businesses, and offer a way for family farmers and fishermen to achieve financial stability through debt restructuring. The complexity of Chapter 12 requires the help of experienced professionals—especially bankruptcy attorneys.

Chapter 15 bankruptcy

Chapter 15 bankruptcy is also known as “cross-border insolvency.” This type of bankruptcy deals with foreign entities that have assets or debts in the US. Chapter 15 bankruptcy enables US bankruptcy courts to coordinate with foreign courts, and lets foreign debtors—including individuals, partnerships, and corporations—seek recognition and help from US courts in dealing with their financial challenges.

In the Chapter 15 bankruptcy process, debtors file a petition for recognition of their foreign insolvency proceedings with a US bankruptcy court. After the court grants recognition, the debtor can get an automatic stay on collection efforts, and pursue assets in the US. The complexity of Chapter 15 bankruptcy requires knowledge of international financial law that requires the help of legal professionals with experience in global insolvency cases.

Get in Touch With Richard P. Arthur

Richard P. Arthur, Attorney at Law, can provide advice about which type of bankruptcy fits your specific financial situation. You can call 937-254-3738 for a consultation. He has more than three decades of experience helping clients in Dayton and Trotwood, as well as Montgomery, Greene, Miami, Clark, and Warren counties.