In its most basic description, bankruptcy is the general term used for insolvency cases among debtors. By legal definition though, bankruptcy is a financial and a legal status of an individual, business, or an entity that are not able to repay their debts. Bankruptcy also refers to the federal court procedure that an individual or a business entity can declare to have their debts discharged or come up with a repayment plan. By declaring bankruptcy, debtors have the chance to start afresh and rise up from their present financial situation. Usually, bankruptcy is divided into two major categories: liquidation and reorganization.
Two major types of bankruptcy
The major purpose of filing for bankruptcy is to be eventually rid of debt. Several factors play into this like a debtor’s level of income, the debts involved, and the bankruptcy chapter where the case will be filed. However, there are two major types of bankruptcies, liquidation and reorganization.
Under liquidation, an official who is usually the bankruptcy trustee handles the liquidation of the debtor’s properties so that the proceeds from the sales can be used and distributed to creditors. Reorganization, on the other hand, is about following a repayment plan that is usually developed by the debtor and the bankruptcy trustee that is approved by the bankruptcy court. Chapter 7 and Chapter 13 respectively are the best examples of bankruptcy chapters showing liquidation and reorganization. These two bankruptcy chapters are also the most commonly filed cases in the U.S.
The Bankruptcy Code or the Title 11 of the United States Code has six major bankruptcy chapters. Each of the chapters are specific to different bankruptcy requirements that an individual or business might need.
- Chapter 7 is the most common type of bankruptcy and is also called as the Liquidation Bankruptcy. Majority of bankruptcy cases are filed under this chapter due to the fact that it’s the simplest and fastest form of bankruptcy.
- Chapter 9, also known as Municipality Bankruptcy, is a type of reorganization bankruptcy between municipalities.
- Chapter 11 is another reorganization bankruptcy involving large business and other corporate bodies. It is also referred to as Corporation Bankruptcy.
- Chapter 12 or Family Farmer or Fisherman Bankruptcy applies to farmers and fishermen.
- Chapter 13 is another popular chapter since it deals with individual reorganization and is also known as an Individual Debt Adjustment bankruptcy.
- Chapter 15, also known as Ancillary and Other Cross-Border Cases, is a unique bankruptcy chapter that deals with insolvencies made by foreign debtors in the U.S.
Applying for bankruptcy
Usually, applying for a bankruptcy case vary from country to country. In the United States, an insolvency case has to be taken to a bankruptcy court for processing and appropriate files and documentations should also be presented.
How much debt do you need to file for bankruptcy?
Actually, there is no minimum or maximum debt bar that you have to consider when applying for bankruptcy. However small the debt is, if a debtor has no more means and capacity to pay it, then filing for a bankruptcy case is the next most practical solution to follow.
How much does filing for a bankruptcy case cost?
Because bankruptcy laws vary from state to state, the cost of filing for a bankruptcy case also varies. But usually, the fees a debtor has to pay for involves court fees and other legal fees involve in the filing of the bankruptcy case.
Since filing for bankruptcy can be a difficult task especially for a debtor who will file their case for the first time, seeking the advice of a legal counsel like a bankruptcy attorney is one good recommendation to follow.