Bankruptcy Types

There are two  types of bankruptcies: liquidation and reorganization. Many debtors  are eligible to file a  no-asset case, whereby  the debtor is allowed to keep exempt assets and discharge eligible debts with little or no property being seized or sold.

Chapter 7

Chapter 7  of the Bankruptcy code outlines the rules governing liquidation bankruptcy. Chapter 7  is available to debtors, both businesses and individuals. After a Chapter 7 bankruptcy petition has been filed, the bankruptcy court  issues  an “automatic stay” which stops all collection activities by creditors against the debtor. A trustee will be charged with determining  the debtor’s nonexempt property, if any, liquidating it and distributing the proceeds to creditors  according to a predetermined order.

When liquidation does not repay  the debtor’s total debt, the remaining debt is discharged and is no longer owed by the debtor.  However, some debts are not dischargeable and survive bankruptcy such as domestic and child support, taxes, student loans and debt accumulated through fraud. For businesses, after liquidation the business is often irrecoverable.


Where there is continuing income that can  be used to pay creditors and there are non-exempt property that the debtor wishes to keep, a reorganization bankruptcy is often the best  choice. Reorganization  under the Bankruptcy Code is governed  by several chapters. Chapter 11  governs reorganization for individual debtors with significant amounts of  debt and large businesses. For those with lower amounts of debt, Chapter 13 governs the direction of the filing process. Municipalities can file for reorganization  under Chapter 9, and Farmers under Chapter 12.

Like Chapter 7, filing for reorganization results in a stay on most collection processes. During reorganization the debtor  through a trustee, creates  a repayment plan to pay creditors over a  3 to 5 year period.

After the plan has been completed as agreed, the remaining dischargeable debts are forgiven. If the agreed terms of the plan have  not been met,  the court may dismiss the case or convert the case to  liquidation.

Involuntary Bankruptcy

In certain circumstances creditors have a remedy for outstanding debts as well. In these cases, the debtor is “forced “ into bankruptcy by a creditor(s).  Involuntary bankruptcy, however, must be handled with care because cases without merit can result in steep penalties for the creditor. Involuntary bankruptcy may be filed under either Chapter 7 or Chapter 11 when there is a minimum level of debt  or if there are a minimum number of creditors. The advantage of filing this type of case  is  to ensure assets  are distributed fairly amongst creditors.


While bankruptcy is a viable and beneficial solution to insurmountable debt for both  creditors and debtors, it is essential that all  cases are handled by a law firm with experience and know how. If you are considering bankruptcy for any reason, or have questions about your financial situation, contact the professionals at   de Moya & Associates, P.C. in Rockland County, New York. We can help you decide whether bankruptcy is the right solution for you. 

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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