Different Bankruptcy Chapters

Bankruptcy is not something which should even be consider unless all other options have been exhausted, it should never be considered as anything but a last resort.

There are six different types of bankruptcy in the U.S. and each of them have been outlined in the Bankruptcy Code (Title 11). There are two types which are very common throughout the country, i.e., Chapter 7 and Chapter 13. But there are 4 other types of bankruptcy which people do not even know about. It is quite interesting and can be really helpful for people to know about all of these types of bankruptcy called “Chapters.” Given below is a little information about each of them:

Chapter 7 Bankruptcy
This is the most common type of bankruptcy and is used for total liquidation by individuals or companies. What happens here is a person or company gives everything they own to a trustee, who then sells everything and uses the proceeds to pay off their debt. The person or company will no longer be responsible for the debt but he or she will not own any property either. In the case of individuals, they do not have to give up any household items or clothes, although they will be expected to continue making child support payments and even pay their taxes. This type of bankruptcy can only be applied for once every 8 years. It may be voluntary but it can also be compulsory. There are some types of debt that do not qualify for this, two of them being student loans and home mortgages.

Chapter 9 Bankruptcy
This type of bankruptcy is only available to municipalities. In past times, when municipalities were not able to pay their debt, certain strict measures were taken in order to recover the money, increases in tax rates was one. This type of bankruptcy was created at the time of the Great Depression. During that time raising the tax rates was not really helping municipalities get any more money. There are some places where state approval is compulsory prior to filing for bankruptcy under Chapter 9. Two of the most famous bankruptcy cases of this type include the Orange County, California case and the Jefferson County, Alabama case.

Chapter 11
Chapter 11 is a type of bankruptcy that is not only available to businesses, but also to individuals as well. However, it is usually used by corporations more than anyone else. It is similar to Chapter 7 in many ways but one major difference is that here the debtor will retain control of all his assets. Instead of involving a trustee, the debtor will be in charge of this along with the supervision from the appointed court. This type of bankruptcy helps a company reorganize themselves more than anything else. One important factor to keep in mind when considering to file a Chapter 11 bankruptcy, is that sometimes, ownership of certain parts of an organization as well as the rights to revenue can go to some of the creditors in order to pay off the debt.

Chapter 12
Chapter 12 bankruptcy is just like Chapter 13, which is discussed in detail below, but only applies to fishermen and farmers. Previously there were not any specific provisions for agricultural professionals and that is what led to the creation of Chapter 12 bankruptcy. Before Chapter 12 bankruptcy there were general provisions which were modified on multiple different occasions with new expiry and renewal dates. However, in 2005 a permanent chapter was finally created for these professionals. There are a couple of restrictions on this type of bankruptcy though. At least 50% of a farmer’s debt has to be linked to farming operations while 80% of a fisherman’s debt needs to be linked to commercial fishing operations. But it does manage to get the major creditors off of an individuals back as long as the debtor does not create any new debts.

Chapter 13
Chapter 13 is the other type of common bankruptcy that many people already know about. The main difference between Chapter 13 and Chapter 7 bankruptcy is that while Chapter 7 liquidates a person’s assets and immediately releases his debt, Chapter 13 is more of a rehabilitation program. Restructuring and reorganization is involved here as well. Debtors need to create a plan that will pay off all their creditors within a minimum period of 3 years or a maximum of 5 years. The only problem with this type of bankruptcy is that the debtor will require a high level of disposable income in order to fund this rehabilitation plan.

Chapter 15
Chapter 15 bankruptcy is the most difficult and  the most complicated. The main differentiating factor here is that the assets of the debtor will be in multiple countries. The provisions that are outlaid in this Chapter basically help mitigate any issues that trustees may face while involved in cross-border litigation. What happens here is that the U.S. courts have the discretion to either provide additional assistance in foreign law proceedings or not.

In short, this was a brief run down of what each chapter of  bankruptcy entails.