Types of Bankruptcy for Individuals

An individual files for bankruptcy when in need for relief from debt. The filing for bankruptcy results in discharging of debt or restructuring of that individual's debt. The United States bankruptcy code, which in some case is also known as Title 11 of the United States Code, specifies two prominent bankruptcy types for individuals. Before we take a look at the types of bankruptcy filings, let us take a look at the definition of bankruptcy.

What is Bankruptcy?

There are two prominent definitions of bankruptcy, first one is the broad one and the second one is used for legal languages.

1. Bankruptcy is a state of insolvency where the individual and the business of individual is unable to repay debts and also has more liabilities than assets.
2. A bankruptcy is a legal procedure where a person's assets are liquidated and debts are paid off according to a pro-rata calculation.

Thus, in simple words, a bankruptcy procedure involves the selling off the assets of an individual and repayment of debts, (on a pro-rata basis) under the supervision of the court and custody of a liquidator.

What are the Types of Bankruptcy for Individuals

As per the procedure, for individuals, there are different bankruptcy which have been included in the United States code of bankruptcy often known as the Title 11. In the following paragraph, we are going to cover 4 types of bankruptcy, namely, Chapter 7, 11, 12 and 13. For a comparative over view you may also read bankruptcy Chapter 7, 11, 13.

• Chapter 7: The Chapter 7 bankruptcy is the oldest and the most common types of bankruptcy. In such a type of bankruptcy all the assets of the filing individual are taken into custody by a liquidator or a trustee. The trustee then liquidates the assets and repays all the debts in a pre-decided proportion. Usually, secured loans are repaid fully first, as most of them such as mortgage loans and auto loans are tied down to specified assets. Next, the unsecured loans are repaid, then the credit cards and subprime lenders. This repayment method is also known as absolute priority method.
• Chapter 11: The Chapter 11 bankruptcy is the modern form of bankruptcy and very rarely filed for, by individuals. In this kind of bankruptcy, the trustee forms a new debt repayment plan. In case of individuals this filing results into introduction of wage garnishment. The court provides the protection of assets from the creditors in the Chapter 11. This filing is also preferred by many businessmen.
• Chapter 12: The Chapter 12 bankruptcy is almost parallel to the Chapter 11 bankruptcy, the only difference being that farmers or farming families and fishermen or their families become eligible for such a type of bankruptcy. The Chapter 12 is proceeding where the court protects the assets and the trustee restructures the debts.
• Chapter 13: The Chapter 13 bankruptcy is a type of bankruptcy which is filed for by people who have a regular income. Under this type of bankruptcy, the court protects the assets of the individual and the trustee and individual reorganize the debts and come up with a debt repayment plan. The big drawback in this bankruptcy is, 100% of the persons income may also be used to repay the debt.

The procedure every type of bankruptcy is difficult and one needs to have a good bankruptcy lawyer for the procedure.