Understanding The Two Main Kinds Of Bankruptcies

There are two kinds of bankruptcies under American law. The first results in the court discharging most or all of a person's debts, and the second allows people to restructure debts and pay as much as their finances will allow. Before starting a case, it will be good for you to learn more about each of these options.

Discharge Under Chapter 7

The discharge of unsecured debts is accomplished through Chapter 7 bankruptcy. Secured debt is anything you owe money on that isn't secured by a tangible asset—usually a car or house under a loan. Creditors can start foreclosure or repossession actions to recover secured assets, regardless of whether someone files for bankruptcy.

When it comes to unsecured debts, folks often owe utility and credit card bills in these cases. Those are dischargeable because the creditor can't repossess electricity or the last meal you had. Chapter 7 is also available to businesses to address similar financial problems.

Liquidation

When a court discharges unsecured debts, a judge will appoint a trustee to liquidate as many disposable and non-exempt assets as possible to pay the filer's creditors. The court allows for some practical needs, including keeping a vehicle, clothing, furniture, and other everyday items. If a person owns several vehicles, however, the trustee will likely sell the least practical ones.

Debt Restructuring

Bankruptcy restructuring filings under Chapter 11 and Chapter 13 are very similar. Filing for Chapter 13 covers personal debts, whereas Chapter 11 is usually for restructuring business debts. In both instances, you can restructure secured and unsecured debts.

There are rare cases where individuals with a bit more than $1 million in debts may pursue Chapter 11. However, anyone considering this route should discuss the idea with a bankruptcy law attorney before filing.

When debts are restructured, the judge typically establishes a three-year payment plan, although a court-approved plan can go up to 5 years. The debtor and their bankruptcy lawyer must propose the plan, and creditors have the right to raise objections. The judge rules after studying the plan and hearing any arguments.

The Court's Discretion

If the court determines a debtor can't pull off a repayment plan under Chapter 11 or 13, the judge may still encourage them to file for Chapter 7. Likewise, the judge may determine a person can pay all they owe and simply reject the petition. Similarly, the judge may reject a Chapter 7 case and encourage the petitioner to pursue Chapter 11 or 13. To reduce the odds of these sorts of messy and costly outcomes, talk to a bankruptcy attorney prior to filing.