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What is Bankruptcy in the US: Types and Alternatives

Utsav Mishra
Feb 25, 2022

Introduction

There are a lot of terms in the financial world. Some are really great. Some are such, that when people hear those there comes a wide smile on their face.

For example, how does it feel when you hear the word “credit”? Like, “Your Salary has been credited”. Such a sweet message it is. Isn’t it?

Now let us move to a slightly darker side of the financial world. Ever read this headline in the news: “XYZ company has been declared bankrupt by RBI/Federal bank”? Ever heard of a company suddenly getting shut down because of no money or too much debt?

Today we are going to talk about this only. After so many things about the financial world, we are here, about to enter into another side of it, with something not so good when it comes to someone.

In this blog, we are going to talk about bankruptcy. What is it? Let’s move ahead and read it together.

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What is Bankruptcy?

Bankruptcy is a legal process that can help those who are having trouble repaying their obligations.

Consumers can wipe out some unsecured debt or enter a repayment plan with better terms depending on the type of bankruptcy they declare.

Debt collection calls, lawsuits, and wage garnishment are all stopped when you file for bankruptcy. Although the process is lengthy and employing an attorney is recommended, you should see some improvements in your finances within six months after filing. Some debts, such as student loans, current taxes, and child support, cannot be discharged in bankruptcy.

Also Read | What is Credit Rating?

Bankruptcy Filing

Individuals must attend a credit counselling session and get a certificate to include with their bankruptcy petition before filing for bankruptcy.

The counsellor should assess your specific situation, provide budgeting and debt management advice, and explain bankruptcy alternatives. Call or go to the website of the federal bankruptcy court in your area to get the names of government-approved credit counselling businesses in your area.

Filing for bankruptcy entails submitting a petition as well as financial statements detailing your earnings, obligations, and assets. You'll also have to fill out a means test form, which will assess if your income is too low to qualify for Chapter 7.

Types of Bankruptcy in the US

In the US laws, Bankruptcy is divided into 6 chapters. These are the chapters of the bankruptcy laws and they define the different types of bankruptcy.

Chapter 7: Liquidation

Chapter 7 bankruptcy, often known as liquidation or straight bankruptcy, is the most prevalent type of personal bankruptcy. The liquidation (selling) of your assets (everything you own that has a worth) to pay off your creditors is overseen by a court-appointed trustee (the people you owe money to).

Any unsecured debt (such as credit cards or medical expenses) is usually forgiven. However, as previously stated, this does not include debts that are not forgiven by bankruptcy, such as student loans and taxes.

Only if the court determines that you do not earn enough money to repay your debts may you petition for Chapter 7 bankruptcy. This judgement is based on a means test, which compares your income to the state average and examines your finances to determine whether you have enough disposable income to repay a reasonable portion of your debts to creditors. If your income is too low, you may be eligible for Chapter 7.

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Chapter 13: Bankruptcy

While Chapter 7 bankruptcy generally results in debt forgiveness, Chapter 13 bankruptcy essentially reorganises your debt.

A monthly payment plan is approved by the court, allowing you to pay back a portion of your unsecured debt and all of your secured debt over the course of three to five years.

The amount of your monthly payment is determined by your income and the amount of debt you owe. However, the court has the authority to place you on a strict budget and monitor all of your expenditures.

Unlike Chapter 7, this type of bankruptcy allows you to maintain your assets while catching up on non-bankruptcy debts. Chapter 13 can also help you avoid foreclosure by allowing you to catch up on your mortgage payments.

Chapter 11: Bankruptcy

Chapter 11 bankruptcy is most commonly used to reorganise a business or corporation. Businesses must devise a strategy for how they will continue to operate while paying off their debt, which must be approved by both the court and the creditors.

Some people, like real estate investors, may choose to file under Chapter 11 if they have too much debt to qualify for Chapter 13 but have a lot of high-value properties and assets. You're probably not going to tamper with this one unless you're a pro athlete or a celebrity.

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Chapter 12 Bankruptcy

This is a repayment arrangement that allows family farmers and fishermen to avoid having to sell everything they own or having their property foreclosed on. While Chapter 12 bankruptcy is similar to Chapter 13, it is more flexible and has larger debt limits.

Chapter 15 Bankruptcy

If a foreign resident has assets, property, or a business in many countries, including the United States, Chapter 15 bankruptcy allows them to file for bankruptcy in the United States.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added it to the Bankruptcy Code. Chapter 15 is the most recent adoption of the United Nations Commission on International Trade Law's Model Law on Cross-Border Insolvency.

If an insolvency case is pending in another country, a foreign firm may choose to submit a Chapter 15 petition. When this occurs, the petitioner must establish the existence of the foreign proceeding.

Chapter 16 Bankruptcy

Chapter 9 bankruptcy, commonly referred to as "municipal bankruptcy," permits a municipality, county, or other taxing body to seek protection from creditors in order to reorganise or adjust its debt commitments. Although Chapter 9 cases are uncommon, they can entail large amounts of debt.

Chapter 9 was written with municipalities in mind, but it applies to more than simply cities and towns. To reorganise debt, counties, taxing districts such as hospital taxing authority, municipal utilities, and school districts might use Chapter 9.

A municipality is a "political unit, governmental agency, or instrumentality of a State," according to the bankruptcy legislation.

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Alternatives for Bankruptcy

When dealing with excessive debt, bankruptcy is one of the prime option to consider; there are others as well. Most of these options will have an impact on your credit, but not as severely as bankruptcy — and they may allow you to keep your property rather than having it liquidated as part of the bankruptcy process.

The following are some bankruptcy possibilities to consider:

Seek assistance from a credit counsellor or a debt management plan that has been approved by the government. A counsellor can work with your creditors to come up with a reasonable repayment plan.

Take out a debt consolidation loan to pay off your debts. These loans can combine several high-interest, expensive debts into a single, lower-interest loan. Look into debt consolidation loans to see if you can reduce your monthly payments and make your debt more manageable.

Ask your creditors whether they'd be willing to agree to a more manageable payback schedule. Defaulting on your debt is something neither you nor your creditors want to happen to you, so they may be ready to work with you to come up with a more manageable repayment plan. Your credit scores will be harmed if you settle your debt.

For a detailed view on alternatives to bankruptcy, watch this:

Conclusion

Debt management is a service provided by nonprofit credit counselling firms to help people lower their credit card interest rates and come up with a monthly payment plan to pay off their debt.

Debt consolidation helps you make regular and timely payments on your obligations by combining all of your loans. Debt settlement is a method of reducing your debt by negotiating with your creditors. It directly reduces your debts if it is successful.

However, if you're thinking of debt settlement instead of bankruptcy because of the impact on your credit, it might not be the greatest option.

In many cases, just like bankruptcy, settling a debt is reflected on your credit report as a negative item. Before making a choice, consult with legal advice to evaluate your best course of action.

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What is Bankruptcy in the US: Types and Alternatives

Introduction

What is Bankruptcy?

Bankruptcy Filing

Types of Bankruptcy in the US

Chapter 7: Liquidation

Chapter 13: Bankruptcy

Chapter 11: Bankruptcy

Chapter 12 Bankruptcy

Chapter 15 Bankruptcy

Chapter 16 Bankruptcy

Alternatives for Bankruptcy

Conclusion

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