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Bankruptcy 101 – Types of Bankruptcy Explained

What is Bankruptcy?

Bankruptcy is a process that allows consumers and businesses to repay some or all of their debts under the protection of the federal bankruptcy court. For the most part, bankruptcies can be divided into two types — liquidation and reorganization. There are multiple types of bankruptcy, but, the most common types filed by individuals are Chapter 7 and Chapter 13 Bankruptcy. Chapter 11 is the most common bankruptcy filed by business enterprises and organizations.

Types of Bankruptcy

  • Chapter 7 Bankruptcy is known as liquidation, straight or complete bankruptcy. It is the most commonly filed bankruptcy among individuals when there is no hope in repaying debt. Chapter 7 Bankruptcy allows them to make a fresh start. Once filed, all assets are collected and reduced to cash. In accordance with bankruptcy law, creditors will be distributed the cash. Businesses may also file under Chapter 7 Bankruptcy, however, it much more common among individuals.


  • Chapter 9 Bankruptcy is also known as adjustment of debts of a municipality. A municipality is expected to reorganize and propose a plan of repayment. Only cities, towns, counties, school districts, taxing districts and municipal utilities can file for Chapter 9 Bankruptcy.


  • Chapter 11 Bankruptcy is known as a reorganization of debt and applies to commercial and business operations. After the order for relief, the business has 120 days to file a court-approved reorganization plan. Creditors must be provided with a disclosure statement that they can evaluate. The courts will make the ultimate decision on whether the plan is approved or not.


  • Chapter 12 Bankruptcy is known as adjustment of debts of a family farmer with regular income and provides debt relief to farmers. The farmer can propose a plan to repay any debt over a three to five year period all while allowing them to continue to operate the farm while the plan is in action.


  • Chapter 13 Bankruptcy is also known as adjustment of debts of an individual with regular income. It is ideal for an individual with a regular source of income that wishes to pay their debt, but, who is unable to do so. Filing Chapter 13 is often more preferable to filing Chapter 7 since it allows the individual to keep an important and valuable asset, such as a home. It is also better to file Chapter 13 Bankruptcy if you owe taxes or child support since these debts are not allowed to be filed under Chapter 7 Bankruptcy. The individual will propose a plan illustrating how they plan to repay creditors over a three to five year period to the bankruptcy court. It is the sole decision of the court to approve the proposed plan. If approved, creditors will receive payments made by the individual by way of a trustee. During the bankruptcy period. Individuals are protected from lawsuits, wage garnishment and any contact with debtors they owe money to. Any remaining debt will be discharged upon completion of the court-approved bankruptcy plan.

Bankruptcy 101  Boca Raton

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