What is Bankruptcy?

Bankruptcy is a federal debt relief process that allows individuals, businesses, or farmers to obtain federal protection for elimination or reduction of their debts. (A debtor may also repay all of their debts under revised repayment terms as well.) There are two main types of bankruptcy - re-organization and liquidation bankruptcies.

There are two other common chapters of re-organization bankruptcy - chapter 11 and chapter 12.

Chapter 11 bankruptcy is for businesses that are facing financial struggles and is similar to Chapter 13. Individuals are also eligible to file chapter 11, but this is only done in exceptional circumstances (such as the debtor has more debts than the chapter 13 limits allow.)

Chapter 12 bankruptcy is exactly like a chapter 13 bankruptcy, however 80% of the eligible debts must be from a family farm operation. Chapter 12 bankruptcy has higher debt limits than chapter 13, to accommodate for the large costs with operating a farm. Chapter 12 bankruptcy is extremely rare.

Chapter 7, which is a liquidation bankruptcy, is the most common bankruptcy and is filed by individuals. Chapter 13, which is a re-organization bankruptcy, is gaining in popularity since congress passed an act in 2005 preventing abuse of chapter 7 bankruptcy filing (filing chapter 7 when the debtor was able to pay off their debts) A chapter 7 bankruptcy is known as a liquidation bankruptcy because when you file under chapter 7, your bankruptcy trustee will take any of your non-exempt property and sell (liquidate) it to repay your creditors (ie, the people you owe money to.) However, some of your property is exempt in bankruptcy and you will be able to keep it. In many cases the debtor has no property that they will lose, and large debts that will all be eligible to be erased in bankruptcy.

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