Types of Bankruptcy in the United States

Bankruptcy is a legal process designed to provide relief to individuals and businesses facing financial distress.

The U.S. Bankruptcy Code establishes different types of bankruptcy proceedings, referred to as "Chapters," each one with distinct rules and applications.

Choosing which bankruptcy chapter to file under depends on several factors, including the nature of the debtor (individual or business), the ability to repay debts, and the overall financial situation.

As we previously examined the bankruptcy types focused on business reorganization¹ – Chapter 11 and Chapter 12 – we now turn our attention to the most common types of liquidation-oriented bankruptcy.

• Chapter 7 – Liquidation Bankruptcy

Chapter 7 is the most widely used form of bankruptcy, allowing individuals and businesses to liquidate non-exempt assets to satisfy outstanding debts. This process is often referred to as ‘straight bankruptcy’ or ‘liquidation’.

While certain assets are protected from liquidation under state or federal exemption laws, non-exempt assets are sold, and the proceeds are distributed to creditors.

A Chapter 7 discharge typically eliminates unsecured debts such as credit card balances, medical expenses, and personal loans. However, certain obligations, including tax debts, student loans, child support, and alimony, generally remain non-dischargeable.

• Chapter 13 – Individual Debt Adjustment

  
  

Chapter 13 bankruptcy is an alternative for individuals who do not qualify for Chapter 7 or wish to retain their assets while restructuring their debts. Under Chapter 13, debtors propose a court-approved repayment plan, allowing them to repay all or a portion of their debts over three to five years.

This chapter is particularly beneficial for individuals with regular income who need protection from foreclosure or repossession. Filing for Chapter 13 also triggers an automatic stay, halting most collection actions.

However, eligibility is subject to income and debt limitations: as of June 21, 2024, to be eligible, an individual's unsecured debt must be less than $465,275, and secured debts must be less than $1,395,875

Each chapter of bankruptcy serves distinct purposes, and eligibility criteria must be carefully considered before filing to determine the most appropriate course of action based on the circumstances.

BSA team has prepared a special material dedicated to general information on bankruptcy law.

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¹ See more details on Chapter 11 (here) and Chapter 12 (here) filling or access https://www.filipecasellato.com/blog