July 9, 2013 by Will Ray
Yesterday we discussed the more basic aspects of bankruptcy, including what exactly it is and when it might be necessary. Today we’ll focus on the types of bankruptcy and understand exactly what is allowed under those types.
To better understand bankruptcy, we can think of it as a shelter. Often you may hear it referred to as “filing for bankruptcy protection.” Bankruptcy protects people who cannot pay their debts from having everything taken from them, including their income.
As I said yesterday, I believe bankruptcy should be a last resort. We ought to be people of our integrity, keep our word, and pay the debts that we’ve taken out, whenever possible. Bankruptcy isn’t so you can run up debt for cool stuff, then get the slate wiped clean and do it again. But sometimes people get into situations where there aren’t many other options, when faced with losing their income they use to feed their family.
There are multiple types of bankruptcy, called “Chapters,” because of the “chapter” of the bankruptcy law that govern them. Chapter 7 and 13 are the main ones you hear about because they can be types of personal bankruptcy. Other types of bankruptcy include:
- Chapter 9, for a city or municipality
- Chapter 11 for business reorganization
- Chapter 12, a farm bankruptcy
We’ll cover some of the basics of Chapters 7 and 13 here – the difference is in the conditions governing each one. Either way, someone going through bankruptcy is appointed a trustee to manage the bankruptcy and help see it through.
- By far the most common type of bankruptcy; can also be for businesses
- Known as a “liquidation” – basically most of your valuable possessions are sold to bring in money and satisfy your debt
- You’re allowed to keep some personal items and maybe your house, depending on the state you live in
- North Carolina residents can have up to $35,000 in equity in their home without it being touched by bankruptcy
- Any other possessions with value are sold, and your creditors receive a percentage of that money based off of your total debt
- Chapter 13 is a repayment plan
- The Trustee and the debtor work work out a repayment plan to pay back the debts
- This repayment plan allows the debtor to keep their stuff, and pay back debt within a certain time period at a reduced rate
- Priority debts (alimony/child support, taxes, mortgage, student loans and secured debts) must be paid in full
- Unsecured debts (credit cards, lines of credit, personal loans, etc.) are paid at a pre-set percentage, usually 20-60% of the amount owed
- If the debtor doesn’t keep up their end of the bargain, the bankruptcy is dismissed, and the debtor loses their bankruptcy protection
- Chapter 13 will stop a foreclosure
As you can see, the different types of bankruptcy offer distinct advantages and disadvantages. They’re structured to protect the debtor, while ensuring that creditors get paid a fair amount where possible. Knowing which to file (or if to file at all) is a question to discuss with a financial coach or counselor, to determine what’s best in your specific situation.
Note: I am not an attorney and this blog post is not legal advice. If you are seeking specific answers about bankruptcy and how it relates to you, you should discuss your situation with a financial coach and/or an attorney.