Bankrate.com is an independent, advertising-supported comparison service. The offers that appear on this site are from companies from which Bankrate.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within listing categories. Other factors, such as our own proprietary website rules and the likelihood of applicants' credit approval also impact how and where products appear on this site. Bankrate.com does not include the entire universe of available financial or credit offers.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
When you can’t get out from under your debt without adversely affecting your livelihood, bankruptcy might be a consideration. Chapter 7 and Chapter 13 bankruptcy are the most commonly filed types of bankruptcy, likely because they’re available to individuals.
However, there are other types of bankruptcy that apply to businesses, individuals and other entities. Here’s what to know about each bankruptcy option.
Types of bankruptcy
The U.S. Bankruptcy Code includes five types of bankruptcy for debts owed in the U.S. (the sixth, Chapter 15, deals with debt encompassing more than one country). Each one applies to a specific type of debtor. Each chapter has its own goal, offering either liquidation, in which certain assets are used to repay creditors, or restructuring, when a payment plan is created to pay a part or all of the debt owed.
Chapter 7, also known as liquidation, allows individuals or businesses to give up nonexempt assets and walk away from most debts. To qualify, debtors must pass the means test — that is, their income must be less than their state’s median income.
Not all debt can be discharged, and discharge is not automatic in Chapter 7 bankruptcy. Individuals who successfully discharge eligible debt are no longer liable for the debt.
This section allows municipalities to reorganize debt. Whether it’s a school district, city or county that’s facing financial hardship, Chapter 9 bankruptcy allows it to restructure the debt and create a plan without selling its assets.
Municipalities that file for Chapter 9 can reorganize debts by lowering the interest rate on existing debt, reducing the principal amount, extending the repayment term or refinancing.
Also known as reorganization, Chapter 11 bankruptcy is for individuals — and, more commonly, businesses — to restructure debt. It allows the filer to draft a plan to repay some debt while retaining assets.
Corporations filing Chapter 11 bankruptcy don’t risk putting shareholders’ personal assets at risk since the business is considered a separate entity from share owners. In a sole proprietorship business, on the other hand, the owner and debtor are the same person, so both personal and business assets are considered in a Chapter 11 filing.
Chapter 11 is much more complicated, and therefore expensive, making it financially feasible mainly for businesses and very wealthy individuals.
Chapter 12 allows family farmers and fishermen with regular income to reorganize debt. Although it works similarly to Chapter 13, this option is more advantageous to farmers who have larger debts and don’t meet Chapter 13 wage-earner classifications. It’s also more straightforward than the Chapter 11 process. Repayment usually stretches out over three years, but a court can also decide to extend the repayment period up to five years if it finds this time period justified.
After the debtor fulfills all payments in the reorganization plan, their debt is discharged. Certain debts, like child support or alimony, aren’t dischargeable through Chapter 12 bankruptcy.
Similar to Chapter 11, Chapter 13 is available to individuals who need to restructure their debt loads. Some creditors will be paid back in full with interest, while others will be repaid a percentage of the debt. Typically, the repayment period is from three to five years.
This type of bankruptcy requires debtors to have regular income, and there are debt thresholds that restrict eligibility. Unsecured debt under this filing must be less than $394,725, and secured debts must be less than $1,184,200. A benefit of Chapter 13 is that the debtor’s home is not at risk of foreclosure during these proceedings.
What to do if you have too much debt
If your debt feels overwhelming, there are a few options you might have. Some of these paths include:
Negotiating directly with creditors. Creditors would rather get some of the money you owe, rather than risk getting nothing (as in the case with Chapter 7 bankruptcy). Be transparent about your financial situation, and see if they’re willing to work with you on a payment plan, debt amount reduction or other solution.
Credit counseling. If you feel like you need more guidance, a nonprofit credit counseling agency can help. They’ll help stop collection calls and create a debt management plan that’s sustainable for your financial situation. You can find out more from the National Foundation for Credit Counseling.
Bankruptcy. Filing for bankruptcy is an option if you’ve tried all other ways to address your debt. This path has long-lasting effects on your credit record, and can adversely affect your credit anywhere from seven to 10 years.
Bankruptcy is a complicated process, so if you decide it’s your best option, you should consult with a bankruptcy attorney. Regardless of which bankruptcy chapter you file, you’re required to undergo credit counseling from an approved agency within 180 days before formally filing bankruptcy.
And remember, not all debt is discharged in bankruptcy, so this option isn’t guaranteed to wipe out everything you owe. Make sure you consult with an unbiased bankruptcy or credit professional before moving forward with this life-changing decision.
Editorial Disclosure: Opinions expressed here are the author’s alone, and have not been reviewed or approved by any advertiser. The information, including card rates and fees, is accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information.