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Types/Chapters of Bankruptcy

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by , 10-07-2011 at 06:01 PM (1109 Views)
There are several different types of bankruptcies. The first basic difference is voluntary and involuntary bankruptcy. These two types of bankruptcies are exactly what their names suggest. A voluntary bankruptcy is when a debtor voluntarily files a petition of bankruptcy, commencing the bankruptcy proceeding on his or her own. An involuntary bankruptcy is when a creditor, or multiple creditors, initiates the bankruptcy proceeding.

Once bankruptcy proceedings have been initiated, there are three different types of bankruptcies: liquidation, reorganization, and adjustment.

Most bankruptcies filed by individuals are liquidation bankruptcies. This type of bankruptcy is governed by Chapter 7 of Federal Bankruptcy Law. Under a liquidation bankruptcy, the debtor’s non-exempt assets are sold and the proceeds are used to pay creditors. Federal Bankruptcy Law lists the property that is exempt from liquidation in 11 U.S.C. 522. However, Federal Law allows states to create their own exemption. There are some federal exemptions that states cannot opt out of and apply in all jurisdictions. If property is exempt, it will not be liquidated and the debtor will be able to keep that property. If an asset of the debtor is not exempt, it is part of the bankruptcy estate and will be sold/liquidated. The bankruptcy estate includes all assets that are not exempt and that will be liquidated. An impartial trustee is appointed at the beginning of a bankruptcy case and is responsible for overseeing the liquidation of the debtor’s nonexempt assets in a way that is most beneficial to creditors.

A reorganization bankruptcy can be filed by an individual or a business, but it is more common for businesses to file reorganization bankruptcies rather than individuals. Debt reorganization is governed by Chapter 11 of Federal Bankruptcy Law. A Chapter 11 debt reorganization case involves court oversight of a plan, filed by the debtor, to repay his or her debts. There are four main types of debt reorganization: debt forgiveness, debt refinancing, debt conversion, and debt assumption. Debt forgiveness is a contractual agreement between the debtor and creditor which reduces or stops the debtor’s obligation to the creditor. Debt refinancing, or debt rescheduling, is when the terms and conditions that had previously been agreed upon between the debtor and creditor in regard to the amount owed are changed. Debt conversion is when the debtor exchanges another asset, or piece of property, with value for the same debt with the same creditor. Debt assumption is when a third party takes on, assumes, the debtor’s debt, relieving the original debtor of his or her obligation. The third party then becomes liable on the debt.

Finally, an adjustment bankruptcy is for individuals who have a steady monthly income. Debt adjustment allows the debtor to adjust his or her debts in order to pay the debt over time. This may have the effect of reducing payments. Generally, this type of bankruptcy allows homeowners to stop foreclosure proceedings in an effort to cure delinquent mortgage payments.
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