Navigating the Complicated World of Bankruptcy

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How To Choose The Right Type Of Bankruptcy

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When you pursue bankruptcy, you will have to decide what sort of case you will pursue. There are two options, liquidation and restructuring. Each has its strengths and weaknesses, so a bankruptcy lawyer will want you to understand both so you can exercise the right option for you.

Liquidation vs. Restructuring

Liquidation refers almost exclusively to the Chapter 7 process. It is available to both individuals and businesses. The idea is that the court will liquidate your non-exempt assets, meaning a court-appointed trustee will sell non-essential items and use the proceeds to pay your creditors. Once the trustee has sold what they can, they just will dismiss what's left that you can't pay.

Restructuring for most individuals occurs under Chapter 13. For most businesses, it will occur under Chapter 11. When someone restructures their debts, they submit a plan to pay a lower amount. As long as the court believes the plan doesn't infringe on creditors' rights, the judge will usually approve. The debtor then must make all payments with a specified timeline, usually three to five years.


The first thing a bankruptcy attorney will tell you is that not everyone is eligible for both processes. Someone who wants to restructure their debts, for example, has to prove they would have enough money to pay the reduced amount. Likewise, some people may have too much income to justify filing Chapter 7. Also, there are scenarios where the court may determine a person has enough to just pay all their debts so the judge dismisses the petition entirely.

Visit a bankruptcy attorney services firm and tell them what your situation is. They can give you a better idea of whether you'd be eligible for either or both processes.

Secured Loans

A secured loan is one where the creditor can physically take an asset back. Car loans and mortgages are the most common ones.

You usually can't hold onto a secured asset in liquidation, unless its value has dropped below what you've already paid. However, you can usually restructure a secured debt in Chapter 11 or 13. If a person doesn't have any secured loans, they may want to go straight to liquidation for speed and simplicity.


Federal rules require the court to leave someone with clothes, transportation, and other basic necessities so they can rebuild their financial life after bankruptcy. Some states also allow further exemptions of specific assets or even money and assets up to certain amounts. If you are eligible for both processes but can exempt most of your stuff in Chapter 7, that may be the way to go.

Contact a bankruptcy attorney to learn more.