Different Types of Bankruptcy
The term bankruptcy is often thrown around as an absolute. In truth, there are different types of bankruptcy available for different types of debtors and situations.
Bankruptcy is a form of federal law. It is generally known as the “second chance” financial law wherein debtors are given a chance to whitewash their debts or at least organize them in a more advantageous manner.
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There are different types of bankruptcy, but most people only really understand one form. It is the chapter 7 bankruptcy. Chapter 7 refers to the area of the bankruptcy code covering this type of action. In chapter 7, a debtor asks the court to erase all of his or her debts. Some debts, such as student loans or taxes, are usually not discharged, but debts like credit cards, car loans, mortgages and lawsuit judgments are.
Chapter 13 is another type of bankruptcy that is becoming more prevalent. Under this chapter, the debtor is allowed to reduce their debts to some extent, but must agree to pay back the remainder over a 5 year payment period. This plan approach was only instituted a few years ago when credit card companies successfully lobbied Congress and President Bush to make the change.
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Ah, but what about businesses? Chapter 11 is typically the type of bankruptcy used by businesses. It is a reorganization approach. Whenever you hear on the news that a major airline or other company has filed for bankruptcy protection, this is what is occurring. The goal isn’t to go out of business, it is to rearrange debts or negotiate new deals.
The negotiation aspect of Chapter 11 should not be discounted. Businesses will use it to force parties such as landlords, unions, and other powerful groups to go back to the bargaining table. If a business suffers a large lawsuit judgment, it may move for bankruptcy protection to create leverage in negotiations to get a better settlement.
There are many different types of bankruptcy. You should never file without the advice of an attorney unless you have a very simple situation. While bankruptcy can help you or your business get a new start, it can also be a field of law full of potential landmines.