The Definition of Bankruptcy Chapters
Bankruptcy is the process of legally declaring the inability to pay unsecured debts to creditors, thereby canceling these existing debts and starting debt-free after the bankruptcy is granted. There are four types of bankruptcy filings: Chapter 7, Chapter 11, Chapter 12 and Chapter 13.
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Chapter 7
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Chapter 7 is the most popular form of bankruptcy filed. Filing a Chapter 7 bankruptcy means that all of the assets not protected or exempt by the bankruptcy law is subject to being collected and sold for the purposes of paying a portion of the debt due to the creditor that the Chapter 7 is filed against. State laws determine what property is exempt and not exempt.
Chapter 13
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Chapter 13 bankruptcy is filed when a debtor wants to keep all of his property, such as when avoiding repossession or foreclosure. There are limitations that apply to filing a Chapter 13, based on income and debt amount. An agreement is made with the Chapter 13 trustee to make consistent payments to the unsecured debtors, to pay off the debt in 3 to 5 years. The payment amount is based on the income, and the debtor is still responsible for paying all other secured debts.
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Chapter 12
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Chapter 12 bankruptcy is designed to help family farmers repay their unsecured debts to creditors in an arranged payment plan, without having to sell their property.
Chapter 11
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Chapter 11 bankruptcy is designed for businesses and corporations, and it's an option for debtors who exceed the limits for a Chapter 13 bankruptcy. This allows businesses to remain in operation without selling their assets as they develop a plan to repay the debts to the creditors. The plan usually includes income and asset liquidation. It's then voted on by the creditors. If most of them agree, the Chapter 11 filing is accepted.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 sets further restrictions and conditions for filing bankruptcy--including that the IRS has to determine which type of bankruptcy a person can file, based on income, and that debtors must seek counseling for debt management. For more information, see Resources below.
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Resources
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