Types of Bankruptcy

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Bankruptcy is the process where consumers and businesses can repay some or all of their debts under the protection of the federal bankruptcy court. Lepant and Lentz, PC LLO in Lincoln, Nebraska lists down the different types of bankruptcy for you to fully understand this process.
Chapter 7 Bankruptcy
A chapter 7 bankruptcy is the most basic form of bankruptcy. It is commonly referred to as “liquidation.” Business entities and individuals may file for Chapter 7. In Chapter 7, a trustee collects the assets you own that are not exempt under state statute and are unencumbered by liens. These assets are then converted into cash.

The cash goes to your creditors in order of priority that is determined by the Bankruptcy Code in full satisfaction of your debts. The difference between what you owe and what you have paid your creditors in liquidation is usually discharged. Some debts, however, are not dischargeable.

Most of your basic living needs are exempt from this liquidation process, including a vehicle for purposes of commuting to work depending on the equity you have in the vehicle. One consideration is whether you have a home encumbered by a mortgage. Should you be behind on the mortgage, you could lose your home under Chapter 7 since your lender will unlikely let you “reaffirm” the debt.

If you have too much equity in your home, you may also be unable to keep your home because it may not be exempt. If you are current on your payments and you do not have too much equity in your home, then it may be possible to keep your residence in a Chapter 7 bankruptcy.

Chapter 11 Bankruptcy
Chapter 11 bankruptcy is most commonly utilized by business entities such as corporations or partnerships to reorganize rather than liquidate under Chapter 7. A Chapter 11 bankruptcy may be an option for an individual if he/she has too much debt to file a Chapter 13.

There are simpler procedures mandated for purposes of a small business being reorganized under Chapter 11. The biggest advantage to filing a Chapter 11 is that the business can continue to operate during the plan.

Chapter 12 Bankruptcy

Chapter 12 is a bankruptcy that is available to family farmers who have regular annual income. The term “family farmer” only applies to certain individuals and business entities, depending on income and debts owed.

As with Chapter 13, this bankruptcy involves the repayment of certain debt through a payment plan that lasts for 3-5 years. Filing a Chapter 12 is usually more beneficial than filing a Chapter 13 for a family farmer because of certain allowances and the reality of a seasonal income.

Chapter 13 Bankruptcy
The principal goal of Chapter 13 is to provide you the opportunity to keep your assets rather than have them liquidated (as in Chapter 7) by paying back your creditors over a period of 3-5 years. In a Chapter 13 bankruptcy, you will pay some, but usually not all of your creditors back.

This utilizes a payment plan that is determined through an accounting of your income and necessary expenses. You must have some form of regular income to make plan payments. The chief reasons people file for Chapter 13 rather than for a Chapter 7 is the following:

  • They are not eligible for a Chapter 7 either because of their income or because they have filed a Chapter 7 in the past eight years.
  • They are behind on their mortgage payments and they want to keep their house.
  • They are behind on their vehicle payments and they want to keep their vehicles.
  • They cannot afford a Chapter 7.

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