Bankruptcy Types - When to Use them?

Sources: irs.gov, uscourts.gov, Experian.com

I had mentioned bankruptcy before when talking about debt management. Bankruptcy is an option if you need a financial reset. There are a variety of bankruptcy types and each of them have requirements. You might not always qualify to remove all your debts depending on what those debts are. There are 6 most common types of bankruptcy that I will talk about. First, let's begin with the debts bankruptcy doesn’t remove.

Bankruptcy does NOT remove:

• Child Support

• Alimony

• Most Students loans (**VERY strict exceptions!)

• Some Federal Income Taxes

• All employer withholding taxes

• Wrongful conduct from debtor. Example: You make credit card charges without the intent to pay it back. Obtaining loans using false financial information.

• Most mortgages or liens. To keep your car or your home, you must continue to make payments.

Now that we know what bankruptcy doesn’t do, let’s talk about how to get the help you need.

How to file for Bankrupcy

To file bankruptcy, you will file a petition. The petition is the request for relief in one of the bankruptcy chapters. You will file a statement of your finances mentioning all creditors and assets on the “Schedule” forms. A debtor (the person that owes money) must fill out a Means Test form showing if they should file under Chapter 13 instead of Chapter 7. A “Means Test” form is the form needed attached to your petition. It shows the amount of money remaining at the end of the month after deducting reasonable household expenses and serves as guide to which chapter of Bankruptcy you qualify for.

You will need to pay the administration filing fee in cash, certified check, money order or 4 month installment. If your income falls below a certain amount, you can request the administrative fee to be waived. Visit www.uscourts.gov for updated fees and documents to file. Additional fees may apply depending on your situation.

You MUST complete the credit counseling provided by a government approved agency. This counseling consultation explores alternatives to bankruptcy if there are any. Once complete, you’ll receive a certificate from the credit counseling agency describing the counseling services you received. This certificate must be filed with the court and attached to the official form. To find an approved agency, find a list on the bankruptcy’s court website or call the bankruptcy court in your area. Without approved credit counseling, your case can be dismissed and you can lose bankruptcy rights if you re-file. Counseling is only waived in very limited situations.

You will later have to attend a Meeting of Creditors (a.k.a. The 341 meeting). Failure to attend this meeting can lead to your bankruptcy case being dismissed. This meeting is required for them to verify all your information, tax return, income, property and debt.

Bankruptcy Types

Chapter 7 (liquidation)

Who is it for?: Individuals, married couples, Corporations/Businesses, and individuals that haven’t had their case dismissed the past 180 days.

What is it: In most cases, ALL property is exempt and the debtor keeps ALL property. A No-Asset case is when the debtor has more assets than can be exempted. The trustee will then sell the property and distribute the proceeds to the creditors.

Pros: a debtor leaves bankruptcy without any future obligations. Some debts CAN’T be discharged. Any amount of unsecured debt from $10,000-500,000.

For Certain properties, liens can be redeemed or purchased for what it’s worth. Some liens on exempt personal property may be voided. For example: a debtor (you) owes $3000 on a car payment. The car is worth $1500. The debtor can keep the car by paying a lump sum of $1500. In some cases these liens on personal exempt property can be avoided completely allowing the debtor to keep the property without making payments. They can also be denied. It’s case by case basis.

Chapter 9

Who is it for?: Cities, Municipalities, counties, townships, school districts and public authorities.

What does it do?: Debtors negotiate a repayment plan with creditors while protecting public services (i.e. education, healthcare, law, etc.).

Chapter 11 (Reorganization)

Who is it for?: It’s mainly used by businesses but individuals whose debt exceeds the Chapter 13 limit can use this too. Unsecured debt about $526,700 and secured debt about $1,580,125 as of 2026.

What does it do?: It allows individuals or organizations to reorganize their debts and finance while continuing to operate.

Chapter 12

Who is it for and what does it do?: Family farmers/fishermen who are financially distressed.

What does it do?: It creates a plan to repay all or part of their debts in 3 years or less and up to 5 years for a special cause (e.g. child support, alimony). It’s for regular annual income or in some cases some seasonal allowance. The amount must not exceed $12,562,250 (farm) and $2,568,000 (fisherman)

Chapter 13 (Home saving/Car Saving)

Who is it for?: Individuals NOT Corporations. It does allow businesses owned by individuals to continue to operate.

What does it do?: A debtor promises to pay all or part of the debt within 3-5 years. If the required payments are made, the debtor can keep the property.

Pros: Some debts that aren’t discharged in Chapter 7 are discharged in Chapter 13. Federal taxes can be paid the term without interest.

Less than $526,700 for unsecured debt

Less than $1,580,125 for secured debt

Chapter 13 may be used to repay past payments and other costs over time.

Reasons your bankruptcy case may be dismissed/not approved:

• Fraudulent transfer of assets.

• Concealment of assets

• Making false statements

• Disobeying the court.

You can also be fined or jailed as these are federal crimes.

Exempt Property:

• A portion of the equity in the debtor’s home

• A portion of the equity in one motor vehicle

• Some or all “tools of the trade” used by the debtor.

*Any exceptions not claimed will be lost. Consult an attorney. Claim exceptions in Schedules filed with your bankruptcy petition.

Chapter 15

Who is it for?: People who have filed debt in more than 1 country.

What does it do?: It assists with cross-border debts/insolvency, assets, for people with debts in more than 1 country. There are limits on jurisdiction of assets to USA and a collaboration with countries based on the United Nations Commission on International Trade Law (UNCITRAL).

📢Need financial advice? Contact me for a 1-on-1 financial coaching session!