Bankruptcy law, just like any other area of law, has its own complicated lexicon, and if you’re filing a bankruptcy claim, it’s important to arm yourself with an understanding of the terminology involved. In this article, attorney Troy Berberick explains the nature and different types of bankruptcy.
First let’s start with the basics: In bankruptcy filings, there are two parties — the creditor and the debtor. Obviously, the debtor is the borrower and the creditor is the lender, usually a company seeking property or money. The debt owed can be either secured or unsecured. In a secured debt, a bank or other organization has the right to repossess property or money, like in the case of a mortgage. But that is not the case with unsecured debt. That’s why when people file for bankruptcy, the creditors that have secured debt with you will always get paid out first. In either case, for businesses and individuals alike, certain debts can be discharged.
Now let’s talk about the types of bankruptcy you can file for. The main difference between chapters of bankruptcy is whether you’re an individual or a company.
Chapter 7 is a liquidation bankruptcy, such as a bankruptcy where the trustee, or the person in charge of collecting assets, sells all a company’s or individual’s non-exempt assets. What constitutes exempt assets varies widely from state to state. But federal statutes, like one in which a couple that’s filing jointly can protect up to $32,300 in home equity. In certain states, like Florida, homestead exemptions are more generous, and a debtor can retain up to 160 acres of property, if not in a municipality. In contrast, the homestead exemption in Georgia is a maximum of $5,000. In liquidation bankruptcies, all debts that are exempt or cannot be liquidated are eliminated, or “discharged.” Chapter 7 is generally not recommended for businesses since it can make regular operation difficult.
Chapter 11 bankruptcy, or a bankruptcy in which the debtor company works with the creditor to create a new payment plan, is the option most struggling businesses undergo, as it allows them to retain ownership. This is also the most complicated type of bankruptcy.
Chapter 12 bankruptcy is similar to chapter 11 in that the debtor retains ownership and creates a new payment plan, but it is far less common since it’s specifically for farmers.
Chapter 13 bankruptcy is similar to chapter 11, but is for individuals rather than businesses. The benefit to this type of bankruptcy, again, is that it helps the debtor avoid total liquidation by working out a payment plan with the creditor. Creditors are often willing to reorganize payment plans with both individuals and companies since it is the more lucrative alternative compared to chapter 7.
For a select few who are versed in bankruptcy law and have relatively simple claims, filing without the help of an attorney is a good option. But either way it’s best to at least consult with a lawyer beforehand, especially since many offer free consultations.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
