When you hear someone talk about filing bankruptcy, keep in mind that the term “bankruptcy” can mean a lot of different things: it is not a “one size fits all” term.
• Chapter 7 – This is the type of bankruptcy that most people think of first. It is referred to as “liquidation” and is available to businesses and individuals. In a Chapter 7 case, you look at your assets (not including exempted items (things you can keep despite filing bankruptcy like your house, cars, etc.) and your debts. Generally, a Trustee will sell everything that is not exempt and use that money to pay the people to whom you owe money (“Creditors”). Most debts (with some notable exceptions) will be discharged after the money runs out and you will be free of those debts going forward.
• Chapter 11 – This type of bankruptcy is known as “reorganization” and it is also available to individuals and businesses. A Chapter 11 case works almost like a pause button on your DVD player in that it gives the Debtor a chance to take a breath, decide which way is best to go, and move forward, hopefully profitably. The Debtor has to propose a plan to the court and Creditors discussing how it plans to move forward and, if it approved, the Debtor is free to operate under the terms of that plan. This is in the best interest of Creditors too because it typically allows them to get more money than they otherwise would.
• Chapter 13 – This type of bankruptcy is available to a certain group of individuals only: people who earn a “regular wage.” Under Chapter 13, the Debtor proposes a “plan” that allows him/her to stretch out most of the debts over a 5 year period and pay as much as he/she can. After those payments are made, most other debts are discharged (again, with some notable exceptions).
• Chapter 9 – This type of bankruptcy has been in the news recently. It is only available to municipalities. Detroit is probably the most high profile municipality to file for bankruptcy recently, but there are certainly other examples out there.
• Chapter 12 – This type of bankruptcy is only available to people who are “family farmers” or “family fishermen.” The process is very similar to a Chapter 13 case but there are some distinct advantages to filing under Chapter 12 if you can
Obviously these descriptions barely scratch the surface of the intricacies of each of these chapters (the Bankruptcy Code that governs this area is over 200 pages!) so you should certainly discuss each of the chapters and their appropriateness to you and your facts with an attorney before making any decisions about how/when to file.