Bankruptcy has been a popular topic in recent news, in part because of the city of Stockton, California. A bankruptcy judge has recently approved the city’s plan to pay back creditors a portion of what they owe while still paying the same pensions for government workers. This choice has been widely discussed, and is the one of the current cases regarding a city in bankruptcy.
Detroit, Michigan has also been recently embroiled in a bankruptcy case since last summer. Detroit’s is the largest municipal bankruptcy case in history in terms of the debt owed. But what does this mean for these cities? Why are they turning to bankruptcy to get out of their financial straits?
Types of Bankruptcy
There are many different types of bankruptcy, each named by the chapters of bankruptcy law that describe them. Each is implemented in different situations and for different purposes. Chapter 11 bankruptcy cases are voluntary and typically filed by large corporations or municipalities owing huge amounts of debt. Creditors will generally fight against this bankruptcy, and the case can take months or even years to complete.
Most individuals opt for Chapter 7 or 13 bankruptcies to avoid this time and money. Chapter 7 bankruptcy is sometimes called total bankruptcy and refers to a situation in which bankruptcy courts seize all of a person’s non-essential possessions and sell them to pay that person’s debts. The courts dismiss any unpaid debts.
Chapter 13 bankruptcy is one in which the borrower can pay back the necessary money, but he or she needs more time to do so. The borrower works out a payment plan with the courts to pay the creditors back eventually, and any leftover debts are generally dismissed. Further research can reveal much more about bankruptcy and the specifics of filing for each type.