Types of Bankruptcy

An individual or organization as a whole when became financially static with a lot amount of credit than income, then the last option he opt is bankruptcy. Bankruptcy is a legal system that declares one bankrupt or unable to do further business. This can be declared personally by filing a form in the bankruptcy court under bankruptcy laws. There are different bankruptcy laws in order to maximize the ability of the debtor to payback the creditor and to minimize the future of creditor and also the debtor as far credit record is concerned. Here we will discuss different types of bankruptcy laws in general, which is applicable everywhere and also the different chapters under the Federal Bankruptcy Act of USA.

Liquidation or Straight Bankruptcy (Chapter 7):

This kind of bankruptcy laws comes under the chapter-7 of the Federal Bankruptcy Act. This is known as the most radical but widely used method. This involves a complete sell out of debtors’ property to pay creditors. But it also offers the option of property exemption under which the debtor can keep certain property that is related to his basic requirement. The exempt property varies from place to place but the debtor has to submit all the non-exempt property to a court appointed trustee. The trustee then sells those properties for repayment to the creditors and the extra amount is returned to the applicant (debtor) for a fresh start. However, this should be the last option when one feels that he/she already crosses the maximum credit limit. This offer quick debt relief but in the process you may loss much. This only takes a maximum of 4 months for repaying debt.

Wage Earner Bankruptcy (Chapter 13):

This kind of plan opted by those who have certain source of income and who are willing to pay their debt with certain amount of debt relief. This offers debtors interest fee repayment and a repayment period ranging from 3 to 5 years. By this act, every month you have to submit a certain amount to the government appointed trustee, who then distributes it among the creditors. This enables debtors by providing the ownership right of the nonexempt property and also a chance to reschedule the home loan or any other loan plan in this purposed period. This also has disadvantage as in the long process the debts acts as a burden in the future income.

Reorganization or Corporate Bankruptcy (Chapter 11):

This comes under the Chapter 11 of the Federal Bankruptcy Act of USA. This is generally used by the corporate industry by reorganizing themselves and restructuring the debt. This also involves a trustee appointed by the bankruptcy court who allows the business to run by reducing some extra business contracts. But this also assures the creditors to get back their money before any more money can be invested in the business itself.

These three types of bankruptcy are the most common among all debtors and creditors, which can be found in all state credit laws. But there are some others prepared for some specific circumstances like Chapter-12 and Chapter-9 in the Federal Bankruptcy Act of USA.

Bankruptcy for Family Farms (Chapter 12): This has been specially enacted for the reorganization of family farms. This allows farmers to payoff their debts by the profit gained in the future crop. As farmers totally depend on the seasonal changes they often face loss due to some natural calamities like heavy rain, flood or drought. So the farmers can file this bankruptcy with high debt. This acts in the same way as chapter 13 or wage planner bankruptcy as the applicant demands certain time period to repay the debt amount by offering regular payment.

Municipality Bankruptcy (Chapter 9): This is only applicable to a specific group like municipality, cities, towns, schools, and hospitals who provide service to the society. If any of the institution or public agencies can’t pay its debts they can file bankruptcy application under this section. As one can’t liquidate the asset of municipality or property of public agency, these agencies usually reorganize their financial affairs and restructure their debts in order to pay creditors. In this case the institutions have to gain the supports of the creditors.