When you think of bankruptcy, you might imagine a negative number, a deficit, or a “closed” sign in front of a business. When you hear the word “bankrupt,” you might think about the idea of having zero funds available to pay creditors — and the reality that some companies can file for bankruptcy but seemingly stay in business. How is that even possible? What's the difference between the various chapters of bankruptcy and why do they apply in some cases but not others?
While you may or may not be worried about bankruptcy affecting you or your credit personally, it is still always wise to understand the different factors that can impact you. Chase Credit Journey® is a free online tool that provides you with your credit score and the factors affecting it.
There are essentially six different types of bankruptcies in accordance with the Bankruptcy Code. Each of these codes are defined in different “chapters.” Let‘s explore this in greater detail below.
Chapter 7 bankruptcy — Liquidation
Known as “liquidation” or “straight bankruptcy,” Chapter 7 bankruptcy is filed to help clear debts by selling off your possessions and returning assets. When you file for Chapter 7, the court puts a hold on debt collections attempts, such as foreclosures. This helps to protect your home, while a court-appointed trustee sells other possessions of yours to help pay back other debts.
Chapter 13 bankruptcy — Wage earner’s plan
Chapter 13 bankruptcy is a plan that is eligible for those who have less than $2,750,000 starting the date of filing, according to uscourts.gov.
It helps to repay debts over the course of three to five years, depending on how much income the person filing makes. Once filed, this Chapter pauses attempts from creditors to collect debts from you.
Chapter 11 bankruptcy — Reorganization bankruptcy
You may have noticed that some companies file for bankruptcy, but are still in business—how? With Chapter 11 bankruptcy, a business can continue to run and borrow money as needed. It isn’t forced to use its assets or company investments to repay debts; however, the business is responsible for following certain obligations such as filing reports as required by the court. There are additional specifications when it comes to small businesses, but essentially it gives a business time to make payments towards their debt without completely stopping operations.
Chapter 9 bankruptcy — Municipalities
Chapter 9 bankruptcy is used only for municipalities. It’s defined by uscourts.gov as a “political subdivision or public agency or instrumentality of a State.“ These include cities, counties, school districts and other types of municipalities. To file this type of bankruptcy, there needs to be a desire to adjust debts and make agreements with creditors to make and implement an actionable plan.
Chapter 12 bankruptcy — Family farmers and fishermen
Chapter 12 bankruptcy is exclusively for family farmers and family fishermen. It allows them to create a plan to repay debts over a period of about three years, unless a longer duration is needed (and is court approved).
Chapter 15 bankruptcy — International
The main purpose of Chapter 15 bankruptcy is to help provide solutions for debtors, assets, etc. that involve more than one country. In fact, in addition to the U.S., 48 other countries have also instituted this law. It assists with creating a cooperative approach to court cases between U.S. courts and other international courts that might be involved by, according to the statute:
- Establishing greater legal certainty for trades/investments
- Offering fair and efficient administration of cross-border insolvencies that protects creditors and interested parties
- Providing protection and maximization the value of debtors’ assets
- Facilitation of the rescue of financially troubled businesses
This type of bankruptcy is typically filed by a foreign representative.
Which should you file for?
You’ll want to make sure you’re keeping track of your financial obligations and monitoring your credit in order to avoid filing for bankruptcy. You can do this by enrolling in Credit Journey® and using the credit monitoring services.
But if you need to file for any of the chapters described above, it all comes down to what kind of debts you owe and your particular situation. For example, if you’re a business, you’ll want to file for Chapter 11. For an individual, you may want to file for Chapter 7, 13 or 12. Moreover, if you are building up credit after bankruptcy, you might want to track your financial habits; enrolling in Credit Journey can assist you on this path.
How bankruptcy affects your credit
Though filing for bankruptcy can allow you to protect important assets like your home, car and more, it will appear on your credit report as a derogatory remark, which can negatively impact your credit score. Additionally, filing for bankruptcy can allow you to protect other important assets like your home, car and more.
Additionally, bankruptcy doesn’t have to last forever, and neither does the ensuing damage to your credit score. Derogatory remarks fall off your credit report after anywhere from 7–10 years, and you can take active steps towards improving your credit over time. In fact, when you use the credit score improvement feature within Credit Journey, you can receive a personalized action plan provided by Experian™ to help you set and meet credit score goals.
No matter what kind of bankruptcy you may be filing for, it’s important to monitor your financial obligations and read the laws regarding each type of bankruptcy carefully. Familiarizing yourself with the specifics of each bankruptcy plan will help you choose the one that best aligns with your financial situation, enabling you to start the repayment plan and debt management process. Note that it might be a good idea to consult your legal advisor.