Hardly anyone living in the U.S. that is not a bankruptcy attorney knows that there are presently seven different ways of filing for discharge. Even if they do know, then they almost certainly wouldn't know what the differences mean, or how those differences could affect them, or which one might be best for them.
Here Are The Seven Different Kinds:
Chapter 7 which relates to liquidation bankruptcies for individuals.
Chapter 9 which relates to municipal bankruptcies.
Chapter 11 which relates to discharges resulting from confirmation of a Chapter 11 plan of reorganization.
Chapter 12 (a&b) which relates to certain family farmer or fisherman cases.
Chapter 13 (a&b) which relates to certain cases involving adjustment of debts of an individual with regular income.
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* Two different versions of Chapters 12 and 13 exist.
In this article we will only examine Chapters 7, 11, 12 and 13 since bankruptcy as it applies to municipalities, is unlikely to be either needed or of interest here.
You Can't Pay Your Debts!
In essence, the various bankruptcy laws provide a way for a debtor who is unable to pay his creditors to resolve his debts, using a supervised dividing up of certain of his assets among his creditors.
The intent behind this supervised division, is to ensure that the interests of all creditors are treated with some measure of equality.
Certain bankruptcy proceedings permit a debtor to stay in business, and to use the revenue thus generated to resolve his or her debts.
While the debtor is either working out a plan or the trustee is gathering the available assets to sell, the Bankruptcy Code stipulates,
a) That creditors must stop all collection efforts against the debtor.
b) When the bankruptcy petition is stamped "Relief Ordered" upon filing, that the debtor is immediately protected from his creditors.
The Different Chapters Explained
Chapter 7 Bankruptcy:
Chapter 7 is the liquidation Chapter of the Bankruptcy Code that is most commonly referred to as "straight bankruptcy" or "liquidation", and it may be filed by,
a) An individual
b) A corporation
c) A partnership
Under Chapter 7, a trustee is appointed to collect and to sell all property that is not exempted, and to use any proceeds therefrom to pay creditors. A person who files for Chapter 7 is allowed certain exemptions, which is technically known as a discharge, and it means that he is allowed to keep certain possessions, and doesn't have to pay certain debts.
A discharge of debts is generally granted to debtors, but it can be denied or revoked by the court, based on certain misconduct of debtors, which might include fraudulent actions such as,
a) A debtor's failure of to disclose all of his assets during a bankruptcy case. Or,
b) Corporations and partnerships do not receive discharges, meaning that individuals that are part of a corporation or a partnership are still liable for debts and often file for a second bankruptcy, as individuals.
Chapter 11 Bankruptcy:
Chapter 11 is a "reorganization" whereby an individual or the owners of a business propose a repayment plan to the creditors who are owed money before the case is filed.
Although it is designed primarily for businesses, it can also be used by individuals who do not qualify to file either Chapter 7 or Chapter 13.
Reasons for non-qualification are,
a) The individual's income is too high for Chapter 7.
b) The amount of debt is too high for Chapter 13.
Chapter 12 Bankruptcy:
Chapter 12 is for those who qualify as family farmers, meaning that a certain portion of the debtor's income must come from the operation of a farming business in order to qualify. Family farmers have to propose a plan to repay their creditors over a period of time from anticipated future income, and the plan must be approved by the court.
Payments are made through a Chapter 12 trustee who also monitors the debtor's farming operations while the case is pending.
Chapter 13 Bankruptcy:
Chapter 13 is for,
a) Individuals who have a regular income, whose debts do not exceed $1,000,000 ($250,000 in unsecured debts and $750,000 in secured debts).
b) Individuals who operate businesses as sole proprietorships.
Corporations and partnerships do not qualify.
Chapter 13 Bankruptcy:
a) Generally permits individuals to keep parts of their property, by agreeing to repay creditors out of their future income.
b) The debtor suggests a repayment plan which must then be approved by the court.
c) The amounts set forth in the plan must be paid to the Chapter 13 trustee who in turn distributes the funds for a small fee.
d) Most debts that cannot be discharged, can still be paid over an extended period of time.
e) After completion of payments under the plan, Chapter 13 debtors receive a discharge of almost their debts.
If you have overwhelming debts and have perhaps tried credit counseling, debt settlement and debt consolidation, but they either didn't or couldn't work, and you now have debt collectors at your door then bankruptcy might be the best route.
The ongoing financial climate is disastrous, and a great many people that ran their lives and businesses effectively for many years, have now been forced into bankruptcy, and the upside to this is that bankruptcy is no longer shameful like it used to be. If bankruptcy appears unavoidable, then hopefully this article will have provided you with enough information to enable you to decide which form of bankruptcy might be right for you. But in any event, I would recommend having a skilled bankruptcy attorney handle the procedure for you, because he will almost undoubtedly save you more money, than he will cost you.
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