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What are the different types of bankruptcy? (Part 1 of 2)

The U.S. Bankruptcy Code, which was enacted by Congress in 1978 and has been amended several times since, sets forth the law that governs all bankruptcy cases.

The purpose of the federal bankruptcy laws is to give individuals who are in over their heads with debt a “fresh start,” and it is a right afforded to Americans by the U.S. Constitution.

The Bankruptcy Code provides for six basic types of bankruptcy, most of which are named after the chapter of the Bankruptcy Code in which they appear.

For this two-part post, we will be discussing the most common types of bankruptcy: Chapter 7, Chapter 11 and Chapter 13. At the end, we will also discuss potential alternatives to bankruptcy, including Wisconsin’s Chapter 128 Reorganization law.

Chapter 7 bankruptcy is also known as “Liquidation” because it turns the filer’s estate into cash in order to pay off as many creditors as possible. However, the word “liquidation” is somewhat misleading because state and federal law allow the filer to keep many exempt assets. Oftentimes, there are no “nonexempt” assets left over at all to liquidate.

Chapter 7 bankruptcy is most common among individual consumers, but they must first qualify for relief by passing a "means test” that makes sure their income is income is within certain thresholds. At the end of the bankruptcy, the filer is released from liability for the dischargeable debts.

Chapter 11 bankruptcy is also known as “Reorganization” because it involves the repayment of creditors through a plan of reorganization that is approved by the court. The plan often consists of reducing the total amount of debts by repaying a portion and discharging the rest.

Chapter 11 bankruptcy is most commonly used by commercial enterprises that want to keep operating with less debt after the reorganization has taken place.

Please check back tomorrow for information on Chapter 13 bankruptcy, alternatives to bankruptcy, and Wisconsin’s Chapter 128 Reorganization.

Source: USCourts.gov, “Bankruptcy Basics: Process,” May 9, 2014

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