A company often files for bankruptcy so it gets legal protection from its creditors. How does it work? It’s simple. A bankruptcy filing would prevent creditors from collecting debts outside the process of the bankruptcy filing.

Although some people or companies consider a bankruptcy filing an effective way of freeing themselves from debt obligations, many of them still make this as their last option. This is because of bankruptcy’s long-lasting consequences.

One of these is the negative effect on their credit report and standing. When they file for bankruptcy, creditors will refuse them from obtaining new lines of credits. This may also give them a hard time applying for new jobs. Moreover, they are sure to get several enemies like their guarantors. This is because guarantors are still required to pay their debts even if they have already filed for a bankruptcy.

Types of Bankruptcy in the US

There are four types of bankruptcy that a person or a company may choose to file depending on a couple of factors.

Chapter 11

Chapter 11 is considered the most complicated bankruptcy filing ever. When a debtor files for a Chapter 11 bankruptcy, it can still continue performing its functions and maintain ownership of all its assets. They can also try to devise a reorganization plan to pay off its creditors.

Debtors have 120 days to submit their payment and reorganization plan. If they fail to do so, creditors will have the option to submit their own payment plans.

Chapter 7

Also called liquidation bankruptcy, Chapter 7 is often what’s meant when a person or a company says they’re filing for a bankruptcy. In liquidation bankruptcy, a trustee sells off all of its non-exempt assets so that it can repay its debts to the fullest extent possible. If in any case there’s a portion of the debt that can’t be paid through liquidation, this can be discharged.

Partnerships, corporations, and individuals are all entitled to file for Chapter 7 bankruptcies.

Chapter 12

Chapter 12 is filed by farm owners. When a farm owner files for Chapter 12, he will still have ownership and control of all his assets while he’s still working out a plan to pay his creditors.

Chapter 13

Chapter 13 may only be filed by individuals. When filing for Chapter 13, a debtor still continues control and ownership of all his assets and also creates a repayment plan. Depending on the debtor’s income, some portion of his debt may be discharged.