TYPES OF BANKRUPTCIES V-2
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TYPES OF BANKRUPTCY
The following is an adaptation of the transcript of Types of Bankruptcy Video-2.
There are three main types of bankruptcy cases. Their chapter numbers in the bankruptcy code refers to these types: Chapter 7, Chapter 11, and Chapter 13.
The bankruptcy code is federal not state law. Bankruptcy cases are filed in the United States Bankruptcy Court and not in a state court.
The most common type of cases for individuals is Chapter 7 and Chapter 13. Chapter 7 is a liquidating bankruptcy and sometimes called straight or total bankruptcy. In return for having, debts "discharged" (meaning the debtors are no longer legally obligated to pay them); the debtor must turn over certain property to the Chapter 7 bankruptcy trustee.
The law allows the debtor to keep some property as exempt so that the debtor can make a fresh start. In most Chapter 7 cases, all property is exempt and so the debtor gets to keep all of their property. These cases are sometimes called no-assets cases. If the debtor has more assets than can be exempted, the trustee may sell the nonexempt property and distribute the proceeds to the creditors according to priorities established by law. Very often, there is not enough money to pay for anything more than the cost of administration and so the creditors receive nothing.
The principal advantage of Chapter 7 is that the debtor emerges from bankruptcy without any future obligations on his or her discharged debts. Some debts cannot be discharged. Some examples of non-dischargeable debts are ones incurred through fraud, or for debts for child support and alimony.
Individuals who want to catch up past-due mortgage payments or car loan payments and keep their assets often use a Chapter 13 case. In Chapter 13, the debtor must propose a good-faith plan to pay all or part of his or her debts with future income over 3 to 5 years. If the court approves the plan, the debts may be settled in this manner even if some creditors object to the plan. If the debtor makes the required payments, he or she will be able to keep his or her property.
Chapter 13 can be a better choice than Chapter 7 for those behind on their home mortgage or car loans. There are other benefits of Chapter 13 over Chapter 7. For instance, some of the debts that cannot be discharged in a Chapter 7 can be discharged in a Chapter 13. In addition, the debtor can pay some non-dischargeable federal taxes over the term of the Chapter 13 plan without interest.
Chapter 13 can only be used by an individual debtor and not by corporations. An individual engaged in business, not as a corporation, might use chapter 13 to pay debts or settle them over a period of time while he or she continues to own or operate the business. Chapter 13 can be used only if the total debts owed are less than a certain limit set for secured and unsecured debts.
Another type of bankruptcy case is Chapter 11 reorganization. It is generally used by businesses. However, individual debtors who do not qualify for Chapter 13 because their debts exceed the Chapter 13 limits may sometimes file a Chapter 11 case.
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