Sometimes filing bankruptcy may be your best option due to inefficient debt management or other legal bills that could have amassed. Sometimes, business owners, in particular, can do these things to avoid bankruptcy. There are five major types of bankruptcy in the United States, and for this article I will provide details of these filing options, along with the consequences of filing bankruptcy and other information to use at your disposal should you need to utilize the U.S. Bankruptcy Code.
General Overview Of The Bankruptcy Process In America
A bankruptcy case begins when a debtor (individual or business entity) files with the bankruptcy court (with or without an attorney). Regulations will usually require one to list all of their debts, income, expenses and assets, which would allow the Bankruptcy Court to determine if bankruptcy is the best route of action. Estimates put annual bankruptcy cases in the United States at somewhere between 1.5 and two million annually, with the goal of many of the cases to have the individual or entity start out with a “clean slate” through either complete liquidation or an efficient reorganization of debts.
The different bankruptcy options for individuals and businesses include Chapter 7, Chapter 9, Chapter 11, Chapter 12 and Chapter 13 filings.
Chapter 7 Bankruptcy
Chapter 7 is considered a complete “wipe away” (liquidation) of debts and assets of either an individual or a business entity, with the only assets exempt for an individual being those allowed under the Bankruptcy Exemption statutes. Note that not all debt with a Chapter 7 can be wiped away easily, as tax liens, child support, alimony, and various types of loans (such as student loans) usually are very difficult (if even possible at all) to wipe away with a Chapter 7 (or any) bankruptcy filing.
Chapter 9 Bankruptcy
Chapter 9 is for cities, towns and municipalities, which help create manageable plans for the government entities to continue making payments on their debts over time.
Chapter 11 Bankruptcy
Chapter 11 is considered the reorganization option for business entities, which similar to a Chapter 13 for individuals, this allows a business to create a more manageable plan to repay their debts over a couple of years, rather than a complete “wipe away” of debts and assets.
Chapter 12 Bankruptcy
Chapter 12 is very similar to a Chapter 11, except this applies to family farms or family fishermen, rather than business entities in general.
Chapter 13 Bankruptcy
Chapter 13 is considered to be more of a reorganization for individuals, rather than a complete “wipe away” of debts and assets. This allows an individual (with the help of the Bankruptcy Court) to create a more manageable plan to repay their debts over a couple of years, rather than throwing in the towel and saying that a “clean slate” is required.
A Decade Of Reporting
A bankruptcy filing can stay on a credit report up to 10 years, depending on the type of bankruptcy filed. While bankruptcy filings give you the benefit of either starting over from scratch or restructuring debts to make them more manageable, you will in fact pay the consequences of said filing as it will be very difficult (if even possible) to be granted additional loans and line of credit approvals with a bankruptcy filing on your credit report.
Filing bankruptcy should always be your final option, after all other options have been considered, due to the length of time a bankruptcy will remain on your credit report. You should try to avoid having to file bankruptcy by incorporating some (or all) of these best practices:
- Try to live below your means
- Avoid trying to keep up with the Joneses
- Always have a written budget and live by it
- Always maintain properly structured major insurance policies such as health, auto, home, etc.
- Avoid marrying without an iron clad prenuptial agreement
- Avoid creating children with financially inept partners
- Use credit cards and other financing vehicles responsibly
- Incorporate your business to separate personal affairs from business affairs
This article was originally written on January 24, 2018 and updated on January 31, 2021.