Are You Struggling With Overwhelming Debt and Considering Bankruptcy?
It’s important to understand the different types of bankruptcy and how they can impact your financial situation.
Frego Law is here to provide you with the crucial information you need. Our expert team will explain the various types of bankruptcy, such as Chapter 7 and Chapter 13, and how they may affect your assets, debts, and future financial stability.
Contact Frego Law today to schedule a consultation and learn more about the different types of bankruptcy. Our experienced team is here to support and guide you towards a brighter financial future. Don’t let overwhelming debt hold you back any longer – take the first step towards a fresh start today!
Definition of Bankruptcy
Bankruptcy is a legal process that provides individuals and businesses with the opportunity to eliminate or repay their outstanding debts when they are unable to meet their financial obligations.
It is a form of financial management that is governed by federal bankruptcy laws and is designed to offer individuals and businesses relief from overwhelming debt.
Bankruptcy can be a viable option for individuals struggling with unsecured debts such as credit card bills and personal loans, as well as for businesses facing challenges in repaying business debts.
There are several types of bankruptcy, each with its own purpose and requirements, including liquidation bankruptcy and reorganization bankruptcy. Understanding the different types of bankruptcy and their implications is essential for individuals and businesses considering filing for bankruptcy.
In order to navigate the complex bankruptcy process and ensure the best possible outcome, it is advisable to consult with a qualified bankruptcy attorney.
Common Types of Bankruptcy
The most common types of bankruptcy for individuals and businesses are:
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is often the most straightforward and common type for individuals. It involves the liquidation of nonexempt assets to repay debts.
Many states have exemptions that protect certain assets from being sold. To be eligible for Chapter 7 bankruptcy, individuals must pass a means test, which evaluates their income and expenses.
Chapter 13 bankruptcy, on the other hand, is a repayment plan for individuals with regular income. It allows debtors to restructure their debts and create a manageable repayment plan over a period of three to five years. 
This type of bankruptcy is beneficial for individuals who want to keep their assets but need relief from their debts.
Chapter 11 bankruptcy is primarily designed for businesses. It allows them to reorganize their debts and continue operations while repaying their creditors over time. This type of bankruptcy is commonly utilized by large corporations or organizations facing financial difficulties but still want to regain stability.
Unsecured debts are financial obligations that are not backed by collateral. This means that if a debtor defaults on these debts, the creditor does not have a specific asset to seize as repayment. Common examples of unsecured debts include:
Unlike secured debts, which are tied to a specific asset like a house or car, unsecured debts are based solely on the borrower’s promise to repay. When facing financial difficulties, individuals with significant unsecured debts may consider filing for bankruptcy to seek relief.
Bankruptcy provides a legal process to eliminate or restructure these debts, helping debtors regain control over their financial situation.
How Unsecured Debts Are Affected by Different Types of Bankruptcies
When it comes to bankruptcy, the treatment of unsecured debts varies depending on the type of bankruptcy filed. Unsecured debts are those that are not tied to any collateral and do not have priority status in bankruptcy proceedings.
Let’s explore how different types of bankruptcies, namely Chapter 7, Chapter 13, and Chapter 11, affect unsecured debts.
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” involves the sale of non-exempt assets to repay creditors. Unsecured debts, such as credit card debts and personal loans, can be discharged or eliminated, meaning the debtor is no longer legally obligated to repay them.
In Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” individuals with regular income create a repayment plan spanning three to five years.
Unsecured debts are included in this plan, and the debtor may pay a portion of these debts based on their disposable income. At the end of the repayment plan, any remaining balances on eligible unsecured debts may be discharged.
Chapter 11 bankruptcy primarily caters to businesses, although individuals with substantial assets and debts can also file under this chapter.
Unsecured debts, such as business loans and credit card debts, can be restructured, allowing the debtor to repay a portion or the entire debt over an extended period. Dischargeability of unsecured debts depends on the specific circumstances of the case.
Certain types of unsecured debts typically cannot be discharged in any type of bankruptcy, including child support and alimony payments, student loans (in most cases), and certain tax debts.
These obligations are considered non-dischargeable and must be paid regardless of the bankruptcy filing.
Secured debts are a significant aspect of the bankruptcy process, as they differ from unsecured debts in terms of their treatment and potential outcomes. Secured debts are debts that are backed by collateral or assets that serve as a guarantee of repayment to the creditor.
Examples of secured debts include mortgages, car loans, and certain types of business loans. In the context of bankruptcy, secured debts are treated differently depending on the chapter under which the debtor files.
How Secured Debts Are Affected by Different Types of Bankruptcies
Secured debts play a significant role in determining how different types of bankruptcies affect an individual or business. Chapter 7, Chapter 13, and Chapter 11 bankruptcies all have distinct impacts on secured debts, taking into account various factors such as:
In Chapter 7 bankruptcy, non-exempt assets are typically liquidated to repay creditors. Secured creditors have a right to repossess or foreclose on the collateral if the debtor is unable to catch up on missed payments.
This means that the debtor may have to surrender their secured assets if they cannot fulfill their payment obligations.
Chapter 13 bankruptcy, on the other hand, offers a different approach to handling secured debts. By proposing a repayment plan, debtors may be able to keep their secured assets.
This plan allows the debtor to catch up on missed payments and repay their debts over a period of three to five years. By adhering to this plan, debtors can potentially retain their secured assets while managing their debt obligations.
Chapter 11 bankruptcy also offers provisions for managing secured debts. Similar to Chapter 13, the debtor can propose a repayment plan. This allows businesses to continue operations while repaying their debts over an extended period.
It is extremely important to note that certain types of debts cannot be discharged or eliminated through bankruptcy, including secured debts.
While bankruptcy may provide relief and reorganization options, it is important to seek professional advice from a bankruptcy attorney to understand the specific requirements, benefits, and drawbacks of each type of bankruptcy in relation to secured debts.
Median Income & Disposable Income Considerations
When considering bankruptcy, it is important to understand how your median income and disposable income come into play. These two factors play a role in determining which type of bankruptcy you may be eligible for and how your debts will be handled.
Median Income Considerations
One of the key determinants in bankruptcy cases is the debtor’s median income. The median income is calculated based on the debtor’s average income over the past six months. This figure is compared to the median income of similarly sized households in the debtor’s state.
If the debtor’s income falls below the median income, they may be eligible for Chapter 7 bankruptcy. This type of bankruptcy, also known as liquidation bankruptcy, allows for the discharge of most unsecured debts.
Each state has different median income thresholds, and these thresholds are periodically adjusted.
Disposable Income Considerations
Disposable income is the amount of money left over after deducting certain allowable expenses from your monthly income.
In Chapter 7 bankruptcy, disposable income is typically not a major consideration, as the debtor’s non-exempt assets are liquidated to repay creditors. 
In Chapter 13 bankruptcy, disposable income plays a significant role. The debtor is required to propose a repayment plan that outlines how they will use their disposable income to repay their debts over a three to five-year period.
The amount of disposable income available will influence the monthly repayment amount. If the debtor’s disposable income exceeds a certain threshold, they may be required to file for Chapter 13 instead of Chapter 7.
Consider your median income and disposable income when contemplating bankruptcy. These factors directly influence the type of bankruptcy you may be eligible for and the overall outcome of your case.
Consult with a bankruptcy attorney to fully understand how your income will be evaluated and how it will impact your financial future.
How Median Income & Disposable Income Affect the Type of Bankruptcy You Can File
When considering bankruptcy, two key factors that affect the type of bankruptcy an individual can file are median income and disposable income. These financial criteria determine eligibility for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy allows for the discharge of most unsecured debts. To qualify for Chapter 7, individuals must have a median income below the threshold set for their state.
This median income is calculated by averaging the debtor’s income over the past six months and comparing it to the median income of households of the same size in their state. These thresholds vary from state to state and are adjusted periodically.
For Chapter 13 bankruptcy, disposable income should be a consideration. Disposable income is the amount of money remaining after deducting certain allowable expenses from the debtor’s monthly income.
In Chapter 13, individuals must propose a repayment plan that outlines how they will utilize their disposable income to repay their debts over a period of three to five years. The amount of disposable income available influences the monthly repayment amount.
Discover financial relief by reaching out to the experienced bankruptcy lawyers at Frego Law today and allow their team to guide you through the bankruptcy process.
 Chapter 13 – Bankruptcy Basics. (n.d.). United States Courts. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
 Chapter 7 – Bankruptcy Basics. (n.d.). United States Courts. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics