When a person files for bankruptcy, he or she legally declares the inability to repay creditors. Bankruptcy can be filed by an individual, a business, or another organization. To file for bankruptcy, the person or organization files a case under one of the chapters of Title 11 of the U.S. bankruptcy code.
The most common types of bankruptcy are Chapters 7 and 13. However, when learning about your bankruptcy options, it is important to understand each of the differences among the various chapters. In fact, there are six different types of bankruptcy:
- Chapter 7: “Straight” bankruptcy. This is the simplest, quickest, and most common type of bankruptcy. Assets of individuals and businesses are liquidated in exchange for debt discharge.
- Chapter 9: Municipal bankruptcy. Helps protect municipalities as they develop a plan to repay their creditors.
- Chapter 11. Rehabilitation or Reorganization. Most often used by business debtors, but can also be used by individuals who have accumulated substantial debt or who hold particularly large assets. Usually, Chapter 11 bankruptcy allows businesses to continue to function as they repay their debts.
- Chapter 12. Family farmers and fishermen. This type of bankruptcy was designed as an economically sustainable solution for those in the agricultural and fishing businesses who receive a regular annual income.
- Chapter 13. “Wage-earner” bankruptcy. A common type of bankruptcy designed for individuals who hold a regular source of income.
- Chapter 15. Cross-border bankruptcy. The newest type of bankruptcy, Chapter 15 deals with cases that involve international claimants, debtors, assets, and other parties.