A Guide to the Types & Classes of Bankruptcy

Types & Classes of Bankruptcy

For many people, the thought of filing for bankruptcy is a terrifying one, and there can be tons of questions going through someone’s mind, like am I going the right way by doing this? or what are the pros and cons of bankruptcy? Some people may have also gone through bankruptcy and told a story, good or bad. So in this article, we will take a look at the types & classes of bankruptcy

Types of Bankruptcy

Bankruptcy may fall into different categories and depending on who you are (individual, business, etc) you would need to know what type of bankruptcy you should file. Let’s take a look at these types of bankruptcy.

  • Chapter 7 – Liquidation
  • Chapter 9 – Municipalities
  • Chapter 11 – Large Reorganization
  • Chapter 12 – Family Farmers
  • Chapter 13 – Repayment plan
  • Chapter 15 – Foreign cases


Types of bankruptcy

Bankruptcy Classifications 

Chapter 7: Liquidation

Chapter 7 bankruptcy is the common type of bankruptcy for many people, and it’s the quickest way to get through. Chapter 7 is also known as “a straight bankruptcy” and involves the payment to creditors, freedom from debts, and the sale of a debtor’s assets. 

In the chapter 7 proceedings, the debtor’s assets are collected and distributed to their creditors, including cash, stocks, bonds, vacation home, etc. The major downfall of chapter 7 is that it depresses the debtor’s credit score. Furthermore, several years after filing chapter 7 bankruptcy, the debtor’s credit score is affected. 

Chapter 9: Municipalities

Chapter 9 bankruptcy, is based on municipalities, and it’s a reorganizational bankruptcy where the municipalities or the debtor restructure their debt to its creditors. Chapter 9 can reject lease agreements concerning the real estate that may have been rented; chapter 9 can adjust the interest rates on obligations that it has incurred, and any executory contracts with unions can be rejected. Filing for Chapter 9 bankruptcy isn’t too easy, and filing would require the best capable legal counsel. Also, it’s only for municipalities and not individuals or businesses. 

Chapter 11: Large Reorganization

Many well-known organizations and individuals have filed for chapter 11 bankruptcy. This type of bankruptcy was introduced as far back as 1978. Chapter 11 proceeding under the US bankruptcy code allows companies or individuals to file for bankruptcy to lower debt levels, reorganize and restructure their debts without fear of shutting down and declaring bankruptcy. 

Chapter 12: Family Farmers

Chapter 12 bankruptcy was created for family farmers as well as family fishermen. Chapter 12 allows farmers and fishers going through bankruptcy to restructure their finances and avoid the dangers of liquidation or foreclosure. 

The fishers or farmers can now have the opportunity to file a plan of reorganization, which is just a legal contract that’s between you and your creditors. Farmers or fishers can surrender their property or renegotiate debt within the reorganization plan. 

Chapter 13: Repayment Plan

Within the chapter 13 repayment plan, the debtor puts forth a repayment plan and a reorganization plan to the court—this repayment plan outlines how the debtor will make such payments to a chapter 13 trustee who will distribute the payments to creditors within the period of 3 to 5 years. 

The chapter 13 plan is very flexible because the debtor can determine the repayment plan’s terms and allow for debt discharge or elimination. Furthermore, the chapter 13 bankruptcy plan is only for individuals and not businesses; persons filing as a husband and wife are also eligible. Someone who files for chapter 13 in the name of their business can’t be suitable, but the individual owners, such as sole proprietors, can do so for the debts they are personally liable for. 

Chapter 15: Foreign cases

Chapter 15 bankruptcy is when businesses or debtors outside the United States have debts within the country. A person who files Chapter 15 bankruptcy would have to first file in their own country. This type of bankruptcy filed in the United States can also be called an ancillary or secondary bankruptcy filing and is usually a bit complicated to file. 

Bankruptcy classifications 

Are the fees I paid my bankruptcy lawyer and trustee tax deductible?

How to file for bankruptcy protection, and the consequences of doing so 

Filing bankruptcy comes in different forms and procedures, and as we know, it is also a legal process. There are a few steps that someone has to go through before filing for bankruptcy protection. The following steps are:

  • Get all documents sorted out
  • Go through credit counseling
  • Complete bankruptcy forms
  • Pay your filing fees
  • Make sure your bankruptcy forms are printed 
  • To file bankruptcy forms, the individual must go to court
  • All documents must be mailed to the court-approved trustee
  • Meeting of creditors by the bankruptcy court


There are also many consequences of filing bankruptcy, and let’s just say it is not always an easy way out. A harsh result is that it will appear on your credit report; for example, if someone files a chapter 7 bankruptcy, it can be on your credit report for as long as ten years from the date you filed your bankruptcy. A chapter 13 bankruptcy will be on your credit report seven years from the date you filed and so on. 

Someone who has filed for bankruptcy cannot get into more debt without the court’s permission. Furthermore, since your debt is being restructured, it will be challenging to try saving money because the primary purpose is to get this debt cleared for the benefit of trying to get a fresh start.

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