Bankruptcy Overview - Navigating the Different Types of Bankruptcy
Bankruptcy is a legal proceeding that allows individuals and businesses to eliminate debts under the protection of Federal law. In a nutshell, there are two types of bankruptcy: liquidations and reorganizations. For individuals and families, the two most common types of bankruptcy are referred to as “Chapter 7 bankruptcy” (liquidation) and “Chapter 13 bankruptcy” (reorganization). There called "chapters" because they are created by different chapters of the federal bankruptcy code. Federal bankruptcy law is very old and extremely powerful. The first U.S. bankruptcy statute was enacted in the year 1800. The current bankruptcy law originated in 1898. Bankruptcy laws were enacted to allow individuals and businesses to obtain a fresh financial start by clearing their debts. While the term “bankruptcy” carries negative connotations, the negativity people feel about bankruptcy stems from a misunderstanding of bankruptcy and its purpose.
The purpose and policy behind bankruptcy law is actually quite positive and optimistic, and these laws are extremely beneficial to individuals, as well as our economy. Some commentators even assert that it is in large part due to bankruptcy laws that the United States has experienced such unprecedented economic growth in its relatively short history. The theory is that because bankruptcy allows people to erase debts and start over with a clean slate, individuals and entrepreneurs more freely take risks and pursue their ideas than they otherwise would. Tens of thousands of people file bankruptcy every year in the U.S., using bankruptcy's fresh start to move on to brighter futures.
Below is a basic overview of the different types of bankruptcy.
Different Types of Bankruptcy
The different types of bankruptcy are referred to as “chapters,” based on the specific chapter of the Bankruptcy Code under which each is created. The most common types of bankruptcy for individuals fall under Chapters 7 and 13 of the Bankruptcy Code. While individuals can also file under Chapter 11, that chapter is most commonly utilized by businesses (e.g. General Motors, Chrysler, Enron, etc.). Below are summaries of Chapter 7 and 13 bankruptcy.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is the quicker of the two, and usually lasts 3-6 months from beginning to end. Chapter 7 can be filed by individuals, married couples, or businesses. The basic idea of Chapter 7 liquidation is to wipe out your debts in exchange for giving up and “non-exempt” assets. The law allows you to keep your exempt assets. In the large majority of cases, all property owned by the filer is exempt and they keep all their belongings, while ridding themselves of troublesome debts. In rare cases, a filer will have non-exempt assets, which assets are then sold by a bankruptcy trustee with the sale proceeds being distributed to creditors. If you have significant non-exempt assets, a Chapter 13 bankruptcy may be a better option for you. An experienced bankruptcy attorney will be able to help you weigh such options.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a repayment plan based on the filer’s income, with little regard for the amount of debt owed. In a Chapter 13 case, you (with your attorney) file a “plan” showing how you will pay some amount (usually pennies on the dollar) towards your debts over three to five years. At the end of the plan period, assuming successful completion of the Chapter 13 requirements, you will receive a discharge of your debts. The most important characteristic of a Chapter 13 bankruptcy is that it allows you to keep your valuable property, which might otherwise be lost, if you can make the required plan payments. Chapter 13 is most appropriate for working individuals with steady income, since a prerequisite to having the Court approve your plan is showing enough income to pay for your necessities (e.g., food, utilities, gasoline, transportation, car insurance, etc.) and to keep up with plan payments. Again, a qualified bankruptcy attorney will be able to advise you what a Chapter 13 plan might look like for your specific circumstances.
Attorney Benjamin M. White is a Grand Rapids bankruptcy lawyer who helps clients across West Michigan in file bankruptcy. Call (616) 920-1932 for a free consultation.