Bankruptcy is the legal process where persons declare that they are unable to pay their debts and request relief from the court. There are two basic purposes of bankruptcy: to give the debtor a fresh start and to repay creditors to the extent that the debtor has non-exempt assets.
Bankruptcy comes in two forms, liquidation and reorganization. The four types of bankruptcies available to private individuals fall under one of these two forms.
- Liquidation Chapter 7, also known as “liquidation,” is usually the simplest and quickest form of bankruptcy. In a Chapter 7 bankruptcy, the bankruptcy court appoints a trustee who gathers and sells any non-exempt property that you might have, and uses the proceeds to pay your creditors. Chapter 7 is available to individuals, married persons, corporations and partnerships.
- Reorganization Chapter 11, a reorganization, is primarily used by business debtors but sometimes by individuals who have substantial assets and debts. Under Chapter 11, a business is allowed to continue operating while the court supervises the reorganization of the company’s debts and determines whether to grant partial or complete relief.
- Chapter 12 is a special type of bankruptcy set aside only for family farmers
- Chapter 13 is the reorganization of an individual’s debts where the individual pays off the debt, or some portion of the debt, usually over a 3 to 5 year period, under a plan approved and supervised by the court.