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What are the Different Types of Bankruptcy in the United States?

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  • Written By: Ken Black
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 November 2018
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While bankruptcy codes vary by country, and some countries may not allow for bankruptcy as many Western countries understand it, there are several types of bankruptcy options available in the United States. These types of bankruptcy are best known for the chapters in the US Code which describes them and their rules. They are Chapter 7, Chapter 11, Chapter 12 and Chapter 13.

Of all the types of bankruptcy, perhaps Chapter 7 is best known. It is also the most severe. All unsecured debts are terminated with money being paid after any assets are liquidated that are not exempt. In most cases, the liquidation of assets will not affect many people, unless they have substantial assets such as land or a second home. Chapter 7 is available both to individuals and corporations.

While Chapter 7 is seen as a termination of all debts, this is not necessarily the case. Some debts, such as secured debts, may be allowed to continue standing. Car loans and home mortgage loans, for example, will still be in effect unless they are defaulted on. If a default does occur, it is nearly like a liquidation in that cars can be repossessed and homes can be foreclosed upon.

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For individuals considering bankruptcy who have student loans, it should be noted these are not subject to termination under Chapter 7 in most cases. In rare situations, where it can be proven that repaying the loan would cause a substantial hardship and significant loss of quality of life, they may be terminated. In other cases, they can still be subject to reorganization and repayment under Chapter 13.

Chapter 11 and Chapter 13 types of bankruptcy are very similar. They are types of bankruptcy which allow for companies and individuals to reorganize their debts and come up with a payment plan. Chapter 11 is preferred by businesses as a way to stay in business while, technically, being bankrupt. Chapter 13 is a less complex form of debt reorganization that includes a repayment plan lasting between three and five years. In both Chapter 11 and Chapter 13 types of bankruptcy, the debtor is able to keep control of their assets as they try to satisfy their debt obligations.

The other type of bankruptcy, Chapter 12, is lesser known perhaps because its focus is so singular in nature. This section is specifically for farmers who run into financial problems. It also allows for reorganization and repayment to creditors, with the farmer keeping his assets in order to earn the money needed to repay those obligations.

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