What Types of Bankruptcy Are There?

by Charlotte Wood
(last updated February 21, 2009)

When I think of bankruptcy, I initially think of being broke and going to a last resort. When you declare bankruptcy, you officially state that you are unable to pay your creditors and most of those debts are cleared. While it may seem like a simple concept, bankruptcy is actually as complicated a financial process as any other. There are different forms of bankruptcy, each one providing you with different options and resulting in varying financial consequences and circumstances. If your current financial situation is such so that you're considering bankruptcy, make sure you understand the different types of bankruptcy so you can make the decision that's best for you.

There are four different types of bankruptcy: Chapter 7, Chapter 11, Chapter 12, and Chapter 13, the most common of which are Chapters 7 and 13.

If you file a Chapter 7 bankruptcy, you liquidate all your debts. You state that you are virtually incapable of paying off your creditors and give up your land and/or possessions as a result of that statement. Property is the most common form of creditor compensation in a Chapter 7 case. Say you're defaulting on a mortgage or car loan, but still want to keep your house or car, you shouldn't file a Chapter 7 bankruptcy because chances are that property will be taken from you. You would want to opt for another form of bankruptcy.

Chapters 11 and 12 of bankruptcy claims are not usually claimed by an average debtor and are the least common. A Chapter 11 case deals with businesses or exorbitantly high individual debts and is called "reorganization." A Chapter 12 case is strictly for family farmers.

The other kind of bankruptcy that you'll be most likely to file if you ever do file bankruptcy is a Chapter 13 case. With Chapter 13 cases, you opt to go on a payment plan covering three to five years and commit to making those payments without fail. This kind of bankruptcy is best for you if you're in danger of losing your house, if you're significantly behind on financial obligations but can catch up given time, or if you have valuable, non-exempt property but still can pay out of your income for a while.

The biggest thing to remember with Chapter 13 bankruptcies is once you commit to paying off those debts according to your plan, you have to do it. Don't forget to factor in your other financial obligations and necessities when agreeing to this plan. Your payments can easily be a tad higher than a mortgage payment and you need to make sure you can afford the debt payment along with your other immediate responsibilities.

Bankruptcy is a solemn financial matter and one that should be considered with the utmost care and contemplation. You need to make the right choice for you and your family, figuring out the best way for you to relieve yourself of debt. Paradoxically, bankruptcy can get you on your way to financial freedom, but you need to use prudence not only in your day-to-day money transactions, but with the type of bankruptcy you file as well. If you know what's available to you then you'll be able to make a educated decision that can bring you back into the black!

Author Bio

Charlotte Wood

MORE FROM CHARLOTTE

Gorgeous Legs for Life

Everyone wouldn't mind have gorgeous legs all the time, but some of us may wonder how it's done, especially if we're not ...

Discover More

Dealing with Dry Hair

Dry hair is a natural state for some people's hair, but there are ways to deal with it. Try out these few guidelines and see ...

Discover More

Creating a Healthy Glow

If you want to know how to create that healthy glow you read about in the celebrity magazines, here's where you can start. ...

Discover More
More Money Tips

Is Bankruptcy Right for You?

Declaring bankruptcy is a big step. Don't do it unless you're sure it's the best thing for your unique situation.

Discover More

Declaring Bankruptcy

Don't look so grim. Bankruptcy sure isn't fun, but it's not the end of the world; if you need to do it, here's how.

Discover More

Which Bankruptcy is Right for Me?

When contemplating bankruptcy, deciding on the type of bankruptcy to file can often be as difficult of a decision as whether ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is nine more than 9?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)