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Bankruptcy

Bankruptcy is spoken about often enough, but did you know that there are many different kinds of bankruptcy? Well there are, so you may be interested to find out what the differences are between the different chapters of bankruptcy.

The Federal Bankruptcy code is Title 11 of the United States Code, and inside of it, there are 4 different bankruptcy filings. These are:

Chapter 7 - Liquidation
Chapter 11 - Reorganization
Chapter 12 - Adjustment of Debts of a Family Farmer with Regular Annual Income
Chapter 13 - Adjustment of Debts of an Individual with Regular Income


The type of filing will usually depend on the financial situation of the particular person, however, the most common type of bankruptcy filed, is Chapter 7. This type of bankruptcy can be filed by companies, married couples as well as individuals. For a debtor who is filing Chapter 7, it means that they are basically getting rid of everything and starting again, hoping for a fresh chance on a clean slate. What happens during a Chapter 7, is that once the filing is underway, either an administrator or a trustee will be appointed to become responsible for selling all of the debtor's assets. Keep in mind, this does not mean everything that the person own, as both federal and state laws allow for some exemptions. This means that the debtor might even be permitted to continue holding some of his/her property such as the primary residence, as well as personal items, for example clothing. Once the assets have been liquidated, the administrator or trustee pays a certain portion of the raised money to certain creditors who are involved. Not all of the creditors will be able to receive pay, so many of the obligations by the debtor are considered to be forgiven - discharged. If a debtor has filed for Chapter 7 bankruptcy, they may not file this type again for 7 years, also, any debts that were not forgiven during the previous filing cannot be discharged in the subsequent filing.

There are, of course, certain kinds of debts which will not achieve forgiveness. These include alimony, child support and taxes, as well as most student loans. Therefore, if a debtor's debt falls into one (or more) of these categories, they will usually file for Chapter 13.

Both Chapter 12 and 13 are essentially the same, except that Chapter 12 is for family farmers, and Chapter 13 is for all other individuals. As long as an individual has a steady and reliable income and an unsecured debt of less than $269,250 and a secured debt of less than $807,750, he/she may file for Chapter 13 bankruptcy. Once the filing has been made, a trustee is assigned. Together, the debtor and the trustee put together a proposal for repayment. The court then decides if this proposal plan will be accepted, denied or altered. When a plan has been agreed upon, it may last from 3 to 5 years.

Remember, filing for bankruptcy is a serious matter and should not be taken lightly. Once bankruptcy has been filed, your credit rating will be affected for many years. The decision to file for bankruptcy should be thought out carefully, and is best made with the assistance and counsel of a financial planner and/or a legal representative.

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