Types of Bankruptcy

Bankruptcy can be categorized into various types keeping in view several factors in mind. For example, on the basis of the parties filing for bankruptcypetition, there are basically two types of bankruptcy – voluntary and involuntary. On the other hand, based on the nature of judgment by the court, the bankruptcy can be categorized in two forms – a reorganization bankruptcy and a liquidation bankruptcy. Let’s go exploring them.

Involuntary Bankruptcy

When the creditors with an objective to recoup the money they have lent to debtors are filing bankruptcy against the individual or organization, it is termed as “involuntary” bankruptcy.

Voluntary Bankruptcy

On the other hand, when the individual or organization that owes huge debts file a bankruptcy petition themselves, it is termed as “voluntary” bankruptcy.

Rehabilitation Or Reorganization Bankruptcy

The reorganization bankruptcy provides the debtor an opportunity to survive insolvency, as they are allowed to carry on with their venture. All they have to do is to reorganize their debts and the available means in a way to partially satisfy their various creditors’ claims. The bankruptcy court may also suggest or demand a repayment plan from the individual or organization that how they are going to achieve this. This type of bankruptcy is also known as Chapter 11, 12 or 13. All of these chapters allow the debtor to continue with their business operations, but they are obliged to pay off their debts partially on a monthly schedule basis. Chapter 11 and 12 provides the liberty to the individuals and the business debtors to reorganize their assets and means in a way to regain control of their finances and make arrangements to pay off the reduced claims of the creditors simultaneously.

On the other hand, according to chapter 13 bankruptcy rules appoints a trustee that proposes a repayment plan for the debtors, which the debtors are obliged to follow. The debtors are also required to pay a substantial amount of money to the trustee as fee. The greatest advantage of filing for bankruptcy of this type is that it allows you to remain in the specific business venture you are running while you get enough time to repay the reduced claims of the creditors. For example, if the total amount of debt you owe is $10,000 and the court allows you to pay 75 cents on each dollar, you will only have to pay $7500. What is more, you can repay this amount in monthly installments as described by the proposed plan of chapter 13 or the common arrangements you make with the consent of the creditors. You are supposed to make the repayment from your bankruptcy attorney’s office. Once you pay off all of these reduced claims, the court will issue you a bankruptcy release.

Liquidation Bankruptcy

On the other hand, the liquidation bankruptcy, as the term suggests, leads the debtor to insolvency that involves selling off their assets in order to satisfy their creditors’ claims to the maximum possible extent. The liquidation bankruptcy is also referred to as Chapter 7 of bankruptcy laws. As per this chapter of the bankruptcy laws, a trustee is appointed to review the assets and other financial means available to the debtors. All of these assets are seized and then sold off by them in an effort to pay the creditors the maximum amount of debts as possible. Because of its nature, filing bankruptcy of this type is also termed as “Straight bankruptcy” by many.