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Different Types of Bankruptcy: Advantages and Disadvantages

By: , dated January 25th, 2013

Bankruptcy is a proceeding in a federal court in which an insolvent debtor’s assets are liquidated and the debtor is relieved of further liability. This basically means that a person (or a corporation) was so far in debt that they felt a fresh start was their only option. More than a million Americans filed for bankruptcy last year, and the number continues to rise.

There are three types of bankruptcies:

  • Chapter 7” – All assets are liquidated, except those that are exempt in your state (possibly a home, car, clothing, household appliances, life insurance, pension, and work-related tools). This property is sold by a court-appointed official or given to creditors.
  • Chapter 11” – Intended largely for businesses. Designed to allow a business to continue operating while repaying creditors through a court-approved plan.
  • Chapter 13” – If you have unsecured debts of less than $269,250 and secured debts of less than $871,551, you may be entitled to this type of bankruptcy protection, which allows you to keep certain property while you pay off your debts under the supervision of a court-appointed trustee.

All three types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property) and stop foreclosures, repossessions, garnishment of wages, utility service cancellations and activities of debt collectors against you. Chapter 7 and 13 bankruptcies provide exemptions that allow you to keep certain assets, though those exemption amounts vary greatly from state to state.

On the downside, it’s not a “get out of debt free” card. Here are some of the disadvantages of declaring bankruptcy:

  • You need to file the claim and pay a fee. You may also need to pay a bankruptcy lawyer , and it can be difficult to find a good one, since some try to maximize their profits by handling cases as quickly as possible instead of giving your bankruptcy the attention it deserves.
  • Some debts cannot be eliminated by declaring bankruptcy, including taxes, student loans, alimony, child support, debts that resulted from fraud or willful injury and some property settlements, fines and penalties.
  • Your bankruptcy will remain on your record for up to ten years. This may make it difficult or impossible to obtain a credit card or a loan.

For these reasons, bankruptcy should be used only when there’s no other solution . However, the law forbids discrimination against those who have filed for bankruptcy, so you cannot be denied a job, public housing or a driver’s license on this basis.

To learn more about what happens if your company declares bankruptcy, read this article.

This article was brought to you by the InvestorGuide Staff Writers and Editors.

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