I get a lot of inquiries regarding types of bankruptcy and thought I would just lay out the different types of bankruptcy and have a short discussion regarding which type is appropriate in certain situations.

Chapter 7 is the type of bankruptcy that makes up a large majority of all bankruptcy cases filed in the United States. It is known as a “liquidation” or “fresh start” bankruptcy. Dischargeable debts are wiped out and non-exempt property is liquidated by a trustee who distributes the money pro rata to unsecured creditors. A chapter 7 case is typically appropriate for people who don’t have any disposable income they can use to repay creditors and who’s debts are primarily unsecured, dischargeable debts like credit cards, medical bills, payday loans, repossession deficiencies, and other unsecured debts.

Chapter 13 is the second most numerous type of bankruptcy. This is a reorganization (repayment) bankruptcy. Typically this option is best for people who have some disposable income they could use to repay all or a portion of their unsecured debt, or for those who need to use bankruptcy to help get caught up on a mortgage they’re behind on, or to prevent repossession on a vehicle. Most chapter 13 cases I see involve an attempt to save a house that is in foreclosure.

There are three other less common types of bankruptcies. Chapter 11 is a business reorganization (repayment). Chapter 11 may also be appropriate for individuals with debt that exceeds the Chapter 13 debt limits. This is the type of bankruptcy several airline companies and other large corporations have filed. Chapter 9 is a bankruptcy to adjust the debts of municipalities. It is rarely used.

Chapter 12 is a reorganization (repayment) plan for family farmer or fishermen. There are a few of these bankruptcies filed every year, typically by family farmers in rural communities. It works similar to a Chapter 13 reorganization, but with specific provisions applicable to family farmers or fishermen.

The bankruptcy reform law in 2005 also created a new Chapter 15 that deals with international cases. The chapter applies where 1) assistance is sought in the US by a foreign court or a foreign representative in connection with a foreign proceeding, 2) assistance is sought in a foreign country in country in connection with a case under this title, 3) a foreign proceeding and a case under this title with respect to the same debtor are pending concurrently, or 4) creditors or other interested parties in a foreign country have an interest in requesting the commencement of, or participating in, a case or proceeding under this title.

My last blog post discussed whether or not an employer could terminate someone’s employment because of a bankruptcy case. The answer was clearly no. Is the answer the same when it comes to a prospective employer hiring you?

If you review 11 U.S.C. Section 525(b) again, as I posted the other day, you’ll see that the answer is not quite as clear. The code says an employer can not discriminate “with respect to employment.” It could be reasonably argued that this would prevent any employer from discriminating in hiring practices just because a candidate had filed for bankruptcy. Most cases interpreting this provision, however, indicate that the statute only applies to the debtor’s current employer and not any employer, [In re Merriweather, 185 B.R. 235 (Bkrtcy.S.D.TX 1995), In re Briggs, 143 B.R. 438 (Bkrtcy.E.D.MI 1992), In re Patterson, 125 B.R. 40 (Bkrtcy.N.D.AL 1990]. Thus, it is questionable whether this protects the debtor from discrimination in applying for new employment.

However, keep in mind, that prospective employers pull credit reports. Many employers will rescind offers of employment or refuse to hire a person merely because of a bad payment history. Thus, if you find yourself considering a bankruptcy case, you are probably having trouble paying your debts as they are due. Even if you are current on payments right now, you likely won’t be in the future and any delinquent payments could equally affect an employment decision in the future.

In fact, some employers would prefer that you have discharged your debts. Many employers would rather not deal with creditors calling its employees during work hours on the job and don’t want the administrative headaches associated with processing wage garnishments. These employers would rather hire someone who is debt-free, instead of someone who has debt problems.

I often get asked this question by my clients. The short answer is no.

The Bankruptcy Code provides debtors protections against discriminatory treatment. (11 U.S.C. Section 525). Among other things, 11 U.S.C. Section 525(b) specifically says that “No private employer may terminate the employment of, or discriminate with respect to employment against, an individial who is or has been a debtor under this title…. solely because such debtor or bankrupt - (1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act; (2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or (3) has not paid a debt that is dischargeable ina a case under this title…”

I couldn’t have said it better or more clearly myself.