What Are Bankruptcy and Its Types?

Banking & Finance

Bankruptcy is a method that is designed to give some financial relief to individuals, business owners, and organizations. In this method, we reduce the burden of the debt from these peoples by taking some legal action on them for the creditors. This bankruptcy comes under the Bankruptcy and Insolvency Act and which is also knows as the BIA act. Under this act, we able to take stay on the preceding which is implemented by one of the creditors, so that we can prevent the other creditors also. 

Bankruptcy is the legal positioning of the individual or a firm or an agency that is not able to repay its debts or dues to creditors. This type of ranking and status have given by the court to the debtor


The bankruptcy process is started by signing the petition and the petition is filed by the debtor on the behalf of the creditors. This process is less common. After the petition, all the assets of the debtor will be evaluated and the assets market values will be measured and then the assets will be used to repay the debts to the creditors. This is a legal process and the court will take care of everything.

Advantages & Disadvantages of Bankruptcy

By filing the bankruptcy petition you can avoid demand letters, their threats, and calls, and also you can avoid creditors disturbance to enter your home, family, or business.Bankruptcy is not a simple and easy process.
Helps is setting the baseline for the creditors. By setting the baseline few of your assets don’t come under this baseline.Requires commitment, effort, and hard work
You can reduce your stress by putting the burden of debt on hold for some more time.It is a long process
It is everything is legalized and no creditor will have any problem in the processing.Once your status is changed to bankruptcy then it is difficult for you to get a loan and rental property in the future.
Your credit score goes to the minus side
You will lose the credit card membership also.

Types of Bankruptcy

  • Chapter 7 : Chapter 7 bankruptcy is for liquidation bankruptcy. In this individuals or businesses are allowed to sell their assets and walk away or they are free from paying most of the debts. To comes under this category of bankruptcy you need to qualify the criteria. The income of the debtor is must be less than the state median income. In chapter 7 bankruptcy, not all the assets will be sold to discharge the bankruptcy. 
  • Chapter 9: Chapter 9 bankruptcy is used by the municipalities and other political agencies to reduce financial stress. All schools, districts, cities, and countries come under the municipalities. In this bankruptcy, if municipalities are not able to repay the amount then they have to restructure the debt and they have a plan on how to repay the amount on time. In this assets are not sold. 
  • Chapter 11: Chapter 11 bankruptcy is used for a reorganization. This bankruptcy is for individuals, businesses to restructure and recalculate the debts which need to repay back. In this individuals and businesses need to rethink and replan the strategy how to repay the debt by holding the assets.   In the Corporate sector, there is always a risk for shareholders because their personal assets are always at a risky point.  For the business owner, their personal and business assets are separated entities for the shareholders, and for the sole proprietorship business, owners both assets are used to repay the debt amount to the creditors in the chapter 11 bankruptcy. The chapter 11 bankruptcy process is very complicated and expensive. 
  • Chapter 12: Chapter 12 bankruptcy is used for family farmers and fishermen. This bankruptcy is very similar to Chapter 13. Its features are more beneficial for farmers because they have larger debts. The process of chapter 12 is very straightforward. After three years we have to repay the amount. If then also someone is not able to pay the amount then the court will decide whether they have to repay the amount after 5 years and they have to pay the amount on the justified time period.
  • Chapter 13: Chapter 13 bankruptcy is for repayment plan bankruptcy. It is similar to chapter 11, this is also for individuals who need to restructure their debt plan. The only difference is that few creditors need to pay the full interest amount, while others need to pay some percentage of the debt. the repayment time period is for three to five years.
types of Bankruptcy

How to avoid Bankruptcy?

  • Negotiate directly with creditors: Give some amount to creditors which you have own and the creditor will avoid getting nothing for the debtor in return.  Be transparent with creditors about your financial situation, and let them decide whether they want to work more and tell them about your plan and when and how you will repay them a debt.
  • Credit counseling: If nothing works then take help from a professional. Some nonprofit credit counseling agencies can help you. They will help you be creating a debt management plan which suits your financial situation.
  • Boost your income: Income is the most powerful weapon for avoiding bankruptcy. More you make money and then you will able to repay some debt to the creditor.
  • Sell your stuff: By selling some of the assets you can gain some money also. If you sell some assets like property, furniture, painting, etc thein then you can collect money for the repayment.

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