Types of Bankruptcies for Individuals | Personal Bankruptcy UK

When it comes to the whole bankruptcy process, there’s a lot more to it than just being able to declare bankruptcy.

While it’s one way to take care of unsecured debt or handle the situation if you’re in too much debt, bankruptcy is a serious life event that has ramifications beyond your pocketbook.

It can track you down while you’re applying for jobs, buying a house, or starting a business and it can affect your credit rating and credit report.

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Now, despite the fact that the main purpose of bankruptcy is to eliminate debt, not all bankruptcies are the same. There are actually six different sorts of bankruptcies, and most likely, you’ll just be dealing with the two most prevalent sorts of personal bankruptcies.

Here, we’ll go over each one so you’re aware of your alternatives for the bankruptcy proceeding. Student loans, government obligations (like taxes, fines, or penalties), reaffirmed debt, child support, and alimony are all excluded from bankruptcy. So, read on to find out more about bankruptcy basics and how bankruptcy affects certain debts.

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What are the different types of bankruptcy?

It’s often difficult to shake off remaining debt when you have other things to pay for. You often owe money to others or take out personal loans from creditors if you can’t use your personal finance streams to cover these debts. You can also sell your business’s assets or look into bankruptcy filings.

But, despite the fact that the fundamental purpose of bankruptcy is to eliminate debt, not all bankruptcies are the same. There are actually six main sorts of bankruptcies:

Chapter 7: Liquidation
Chapter 9: Municipalities
Chapter 11: Large Reorganisation
Chapter 12: Family Farmers
Chapter 13: Repayment Plan
Chapter 15: Used in Foreign Cases

Using any debt management can hugely affect your credit file so, before considering bankruptcy, you should speak with an expert and find a good wage earner’s plan that fits your current financial circumstances.

Chapter 7 bankruptcy – Liquidation

Chapter 7 bankruptcies, often known as the liquidation or straight bankruptcy process, is the most prevalent type of personal bankruptcy. The liquidation of your business assets to pay off your creditors is overseen by a court-appointed trustee.

Any unsecured debt, such as credit cards or medical bills, is usually forgiven. However, this does not include debts that are not forgiven by bankruptcy, such as student loans and taxes.

Now, depending on the area you live in, the court may not order you to sell certain items. For example, most people can keep their homes, cars, and retirement savings if they file for Chapter 7 bankruptcy, but nothing is guaranteed.

A foreclosure can’t be stopped with Chapter 7, but it can be postponed. Reaffirming the debt, which involves recommitting to the loan agreement and continuing to make payments, is the only way to keep the items you still owe money on.

However, the majority of Chapter 7 bankruptcies are no-asset cases, which implies there is no property worth selling.

Only if the court determines that you do not earn enough money to repay your debts may you petition for Chapter 7 bankruptcies.

This judgment is based on a means test, which looks at your finances and compares your income to the state average to see if you have enough disposable income to pay back a reasonable amount of what you owe to creditors.

Keep in mind that if you file for Chapter 7 bankruptcy, you will be required to attend a creditors’ meeting, where those who owe you money can interrogate you about your debt and finances. That sounds about as entertaining as it gets.

Chapter 7 bankruptcies will appear on your credit report for ten years, and you won’t be allowed to file for it again until eight years have passed.

Chapter 9 bankruptcy – Municipalities

Another repayment strategy is the Chapter 9 bankruptcy code, which allows towns, cities, school districts, and other entities to reorganise and repay their debts.

Chapter 11 bankruptcy – Large Reorganisation

This bankruptcy code is most commonly used to reorganise a business or corporation.

Businesses must devise a strategy for how they will continue to operate while paying off their debt, which must be approved by both the court and the creditors.

Some people, like as real estate investors, may choose to file under Chapter 11 if they have too much debt to qualify for Chapter 13 but have a lot of high-value properties and assets.

You’re probably not going to tamper with this one unless you’re a pro athlete or a celebrity.

Chapter 12 bankruptcy – Family Farmers

This is a repayment arrangement that allows family farmers and fishermen to avoid having to sell everything they own or having their property foreclosed on.

While Chapter 12 bankruptcy is similar to Chapter 13, it’s more flexible and has larger debt limits.

Chapter 13 bankruptcy – Repayment Plan

While Chapter 7 bankruptcies generally result in debt forgiveness, Chapter 13 bankruptcy essentially reorganises your debt.

A monthly payment plan is approved by the federal court, allowing you to pay back at least a portion of your unsecured debt and all of your secured debt over the course of three to five years.

The amount of your monthly payment is determined by your income and the amount of debt you owe.

However, the court has the authority to place you on a strict budget and monitor all of your expenditures.

Unlike Chapter 7, this type of bankruptcy allows you to maintain your assets while catching up on non-bankruptcy debts. Chapter 13 can also help you avoid foreclosure by allowing you to catch up on your mortgage payments.

Chapter 15 bankruptcy – Used in Foreign Cases

Chapter 15 deals with international bankruptcy matters and provides access to bankruptcy courts for overseas debtors.

In 2005, Chapter 15 bankruptcy was created to the legislation to address cross-border cases involving debtors, assets, creditors, and other stakeholders located in multiple countries.

Typically, this sort of petition is filed in the debtor’s home country.

What is personal bankruptcy?

For different sorts of filers, the Bankruptcy Code provides different types of relief. What chapter of bankruptcy best fulfils your aims is usually determined by your financial status. Now, Chapters 7, 11, and 13 are the key types of bankruptcy law that you can benefit from and use to pay off your unsecured debt and secured debts.

If you’re seeking to avoid a repossession because of a temporary loss of income, Chapter 13 bankruptcy can be the best option for you.

If your auto payment isn’t the issue, but you’re facing income garnishment due to medical bills or credit cards, Chapter 7 may be a better option for you.

In any case, keep in mind that bankruptcy is a safety net, and there is no shame in using the bankruptcy laws to gain a fresh start, even if it doesn’t feel like it. That’s why they’re there in the first place.

Consult a bankruptcy professional to evaluate whether Chapter 7 or Chapter 13 bankruptcy is the best option for you.

You’ll want to make sure that bankruptcy can handle your problem debts and that you’ll be able to take advantage of the fresh start that bankruptcy provides.

A bankruptcy trustee, who works with the bankruptcy courts to represent the debtor’s estate, may sell nonexempt things, which are items that are not protected during bankruptcy. The list of products that are not excluded varies per state.

Which type of bankruptcy is right for my situation?

Because bankruptcy is a complicated legal process, it’s a good idea to speak with an experienced bankruptcy attorney to see if it’s an option for you and which sort of bankruptcy would be best.

Chapter 7 may not require a repayment plan however, it does require that you liquidate all non-exempt assets in order to pay back creditors.
Chapter 11 is often used by large businesses to help them stay active while repaying creditors and is a business reorganisation plan.
Chapter 13 bankruptcy discharges qualified debts over a three- or five-year repayment plan.

Bankruptcies under Chapter 7, Chapter 11, and Chapter 13 all have an impact on your credit, and not all of your debts are discharged.

Bankruptcy is a legal process that allows you to reorganise your debts or have them dismissed because you are insolvent. “Insolvent” refers to a financial situation in which you are unable to pay your payments, usually because your debts exceed your income.

It’s critical not to rush towards bankruptcy, regardless of how you got into this situation. Consider all of your alternatives and contact with a knowledgeable bankruptcy attorney to see if bankruptcy is right for you.

Chapter 11 vs Chapter 13 bankruptcy

Individuals and small businesses are more likely to benefit from Chapter 13 bankruptcy.

For organisations or individuals with debt levels higher than those allowed in Chapter 13, Chapter 11 bankruptcy is usually the best option. Under Subdivision V, some small business owners and individuals can take advantage of expedited Chapter 11 procedures.

If you qualify for Chapter 13 bankruptcies and determine that it will satisfy your needs, you should file it rather than Chapter 11 bankruptcy.

Chapter 11 vs Chapter 7 bankruptcy

Individuals who want a fresh start will, in most situations, seek to file for Chapter 7 or Chapter 13 bankruptcy. Now, while it’s common for individuals to file for this type, companies can also file for Chapter 7.

This type of bankruptcy focuses on getting rid of as many debts as feasible while also liquidating assets to pay for a variety of residual debts that can’t be discharged.

It’s not necessary to have a certain amount of debt to pursue Chapter 11 or Chapter 7 bankruptcy cases. Individuals must, however, pass a “means test” to apply for Chapter 7 bankruptcy since not everyone can ensure successful completion of the debt.

This usually entails a high amount of unmanageable debt and/or a low income that makes debt repayment difficult. Those with disposable incomes have a lower chance of having their Chapter 7 bankruptcy cases granted.

Bankruptcies filed under Chapter 11 and Chapter 7 remain on credit reports for ten years following the filing date. Chapter 13, on the other hand, only stays on a credit record for seven years.

A bankruptcy can have a significant negative impact on a person’s credit score. It frequently inhibits people from acquiring additional loans or getting credit cards approved. It also makes purchasing a vehicle or a home almost impossible.

While this may make sense early on in a bankruptcy, it might come back to haunt the filer many years later, long after debts have been forgiven or settled.

Chapter 7 vs Chapter 13 bankruptcy

Although Chapter 7 bankruptcy is quicker and less expensive than Chapter 13, it may not the best option for everyone.

Businesses can petition for bankruptcy under Chapter 7 or Chapter 11. Businesses that file for Chapter 7 bankruptcy are on their way out. All of the company’s assets are sold, including real estate and personal property, and unsecured creditors are paid in order of priority. Businesses are not allowed to seek exemptions; everything is subject to the same rules.

A Chapter 11 bankruptcy, on the other hand, can be utilised to restructure a company’s financial commitments and debts. The automatic stay provides bankruptcy protection to the business, allowing it to establish a payment plan.

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How much do I need to file for Chapter 7?

This is assessed by seeing if you meet the means test requirements. If your current monthly income (CMI), which is the average of your last six months’ earnings, is less than the current state median limit, you will be eligible.

So, if your CMI is higher than the state median income, you can use the means test to discover if you are eligible.

How much do I need to file for Chapter 11?

If you file for bankruptcy on your own, you’ll have to pay £680 to cover the following costs:

a £130 adjudicator’s charge
a £550 deposit that will only be refunded if your application is rejected

Payments can be made in instalments, but you must pay the entire amount before filing for bankruptcy.

How much do I need to file for Chapter 13?

Before your application may be processed, you must pay a fee of £680. This is something that can be paid in instalments.

An adjudicator will review your bankruptcy application and, if necessary, issue a bankruptcy order. You will receive a copy of the order shortly after it is placed. The Official Receiver (OR) may interrogate you about your condition.

In most cases, you will be freed from bankruptcy after a year. The Official Receiver will investigate whether you have any assets in bankruptcy, such as a home, that could be sold to help pay your creditors.

If you have a monthly disposable income after taking into account your basic living expenses for you and your family, you may be forced to make payments under a three-year Income Payments Agreement.

Advantages and Disadvantages of Bankruptcy

Depending on the type of bankruptcy petition you file, declaring bankruptcy can help you get rid of your legal obligation to pay your debts and save your home, business, or capacity to operate financially.

However, it can harm your credit score, making it more difficult to obtain a loan, mortgage, or credit card, as well as purchase a home or business or rent an apartment.

If you’re debating whether or not to file for bankruptcy, your credit is almost certainly already harmed. However, a Chapter 7 bankruptcy will be on your credit report for ten years, and a Chapter 13 will appear on your credit reports for seven years.

The discharge will be visible on your report to any creditors or lenders to whom you apply for new debt.

How Does Bankruptcy Impact Your Credit?

Any sort of bankruptcy can have a negative influence on your credit score. It’s a black mark on your credit reports that can last up to ten years, depending on the sort of bankruptcy you declare.

However, most people have already missed multiple payments and may be in collections with one or more accounts by the time they file for bankruptcy. If this is the case, bankruptcy is unlikely to drop your credit score further than it is now.

And, if you make timely payments on your obligations and are better able to manage your money, your credit score may begin to improve again after bankruptcy.

Being Discharged From Bankruptcy

A debtor who receives a discharge order is no longer legally obligated to pay the obligations listed in the order. Furthermore, once the discharge order is in effect, any creditor identified on the order is prohibited from engaging in any form of the collection effort, such as making phone calls or sending letters, against the debtor.

Tax claims, anything not stated by the debtor, child support or alimony payments, personal injury bills, and debts to the government are among the debts that do not qualify for discharge.

Furthermore, any secured creditor can still enforce a lien against the debtor’s property, as long as the lien is still valid.

Summary

It’s highly possible to avoid bankruptcy, especially since we all have different living expenses, income streams, and debt. There’s no one sure bankruptcy case to solve every situation. But, millions of people have used bankruptcy to get out of debt and start again.

It’s crucial to understand the distinctions and similarities between different sorts of bankruptcy.

Bankruptcy is one of the most efficient and successful strategies to get out of debts if you’re unable to repay creditors. The majority of people who go this route will file certain bankruptcy proceedings, particularly Chapter 7 or Chapter 13.

Which is the best option is determined by the individual’s assets, financial objectives, and financial situation.

It’s a legal way to get out of debt and there are different sorts of bankruptcy are available based on the type of filer. So, speak to an expert today to see which bankruptcy proceeding works best with you.

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