Types of Bankruptcy

The over arching concept of bankruptcy is the same no matter what the context is. A person or business is no longer solvent and cannot pay back creditors to their satisfaction.

However, in order to maximize the ability of the debtor to pay back the creditor and at the same time minimize the damage to the future of the creditor, there are different kinds of bankruptcies.

These are outlined in the United States Bankruptcy Code. Generally, there are five Chapters that deal with the debtor creditor relationship specifically, and the different options the debtor has when filing for bankruptcy.

Chapter 7:

  • This is known as the harshest type of bankruptcy and it is often used as a last resort for a business or person who has stretched their credit to the absolute limit. It automatically stops all debts and forbids the creditors from pursuing the debtor at in private or in public. However, the debtors must turn over all of his accounts to the government trustee, then he or she will sell these assets in hopes of paying back the creditors.

Chapter 9:

  • Chapter 9 can be filed by a town or municipality that cannot pay it’s debts. These institutions are treated differently because, although they are in fact corporations, they are still accountable for many basic human services. No one is going to start liquidating hospitals right?

Chapter 11:

  • This is the most desirable form of bankruptcy. It’s like saying ‘I give up’ but please let me make it up to you. Again a trustee is brought in who basically enacts a formula where the business may stay in business, but the debts are restructured in a way that the creditors will get their money back before any more money can be invested in the business itself.

Chapter 12:

  • This is especially for family farmers who own a lot of land. Because their work is both seasonal and subject to acts of god, they have special considerations. It only seems fair, considering the make our food and stuff.

Chapter 13:

  • Individuals most often claim this. Often they are ordered to pay back their debts over a period of time, with some debt relief.