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Confused About "Consumer Bankruptcy" Vs. Bankruptcy In General? Clarification That Can Help

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When you think of bankruptcy, you are probably thinking of the most basic aspects of it. A bankruptcy filing does away with your debts, wiping your financial slate clean and providing you with a fresh start. That is probably what you think of most often, but then you are thrown phrases like "consumer bankruptcy", "non-consumer debt", etc. This may be confusing, since you thought all debt under bankruptcy law was essentially the same. To unravel the confusion, the following clarification is provided.

Consumer Bankruptcy

The moniker, "consumer bankruptcy" is a little confusing. It is the phrase that lawyers use to describe personal debt, the kind incurred by everyday persons purchasing items and living beyond their means or those who lived well but suddenly became financially strapped. It does NOT include business debt, which typically means debt incurred for opening and operating a business. In short, a consumer bankruptcy then, is the type of bankruptcy you would file on your personal debt.

This kind of bankruptcy includes:

  • Loans (except primary mortgage and school loans)
  • Credit cards
  • Consumer debt acquired via some other means which is accruing interest and is expected to be repaid

You have the option of liquidating personal assets and selling off extra property or recreational vehicles to decrease the debt, but it is not mandatory to do so.

Bankruptcy for Businesses (or Non-Consumer Debt)

Any other kind of debt that is not related to your personal finances is non-consumer debt, for which you would file a non-consumer bankruptcy. There are four sub-chapters of bankruptcy, with Chapter 7 and Chapter 13 applying to consumer debt, and Chapter 11 and another sub-chapter are generally reserved for non-consumer bankruptcies. The judge in your case will determine if any debt for which you are filing a bankruptcy is consumer or non-consumer debt. If it is decided that there is a clear delineation between several items on your petition, you may have to file two separate petitions for two different kinds of bankruptcy (i.e., non-consumer and consumer).

For people who are sole proprietors of their businesses or who have registered as incorporated owners, these delineations are a little bit trickier. You may have started your business with a big chunk of your own money, or money gifted to you that is expected to be repaid. As such, the judge will have to determine if your business can be filed under a consumer bankruptcy rather than a non-consumer bankruptcy.

If you would like to learn more, contact an attorney like Stuart R Whitehair Attorney