Under the US Bankruptcy Code there are six basic types of bankruptcies. These bankruptcies are named after the chapter that describes them. Understanding the basic facts of each of these chapters can help you understand which chapter you should file under.
Chapter 7
When people say that they are filing for bankruptcy, they are usually referring to Chapter 7. This is also known as liquidation bankruptcy. Chapter 7 is a court supervised procedure in which a trustee is appointed. The trustee then sells off all the non-exempt assets of the debtor with the aim of paying off as much of the debt as possible. The debt that cannot be repaid after liquidation is discharged by the court. Getting a discharge means that the debtor is no longer personally liable for the specified debts.
Chapter 7 bankruptcies can be filed by individuals, businesses and partnerships. However, businesses usually avoid Chapter 7. This is because they need their business assets to run their business operations.
According to the new bankruptcy law, individuals have to pass the “mean test” to qualify for Chapter 7 bankruptcy. According to this “mean test”, the debtor income should not exceed a certain limit. This limit varies from state to state.
Chapter 11
Chapter 11 bankruptcy is also called Reorganization bankruptcy. This bankruptcy is usually used by businesses. Some individuals also qualify for Chapter 11 bankruptcy if their income is very large. In Chapter 11 bankruptcy is allowed to function and retain ownership of all assets while working on reorganization to pay off all the creditors.
Under Chapter 11 bankruptcy, for the first 120 days the debtor has an exclusive right to file a plan of reorganization. This reorganization plan should also include a disclosure statement, which should contain adequate information to allow creditors to properly evaluate the plan. It is upto the court to approve or disapprove the plan.
Chapter 13
Chapter 13 debt is known as the Adjustment of Debts of an Individual with regular income. Chapter 13 bankruptcy allows an individual with regular income to restructure his or her debts. Chapter 13 bankruptcy is a better option than Chapter 7 bankruptcy because it allows debtors to keep their valuable assets.
After the case is filed by the debtor, a trustee is assigned to help the debtor formulate a repayment plan. The court then either approves or seeks changes in the plan. Once the plan goes into effect, the debtor is given 3 to 5 years to repay the debt. In most cases, the debtor is required to repay 30 to 50 cents on the dollar.
Chapter 9
Chapter 9 bankruptcy is called the Adjustment of Debts of a Municipality. It can only be filed by a municipality. Municipality can include cities, towns, villages, counties, taxing districts, municipal utilities, and school districts.
Chapter 12
Chapter 12 bankruptcy is called the Adjustment of Debts of a Family Farmer or Fisherman with a regular income. The process in Chapter 12 is just like the one in Chapter 13. A trustee is appointed to workout a repayment plan. The debtor under Chapter 12 has three years to repay the debt. If the debtor needs more time to repay the debt, then he/she needs to get the approval from the court. Chapter 12 bankruptcy allows the farmer or the fisherman to carry on with business operations while repayment is being worked out.
Chapter 15
Chapter 15 is another type of bankruptcy. It is called the Ancillary and Other Cross-Border Cases. It deals with cross-border insolvency. Chapter 15 is applied to cases in which the debtor or his/her property is subjected to the United States’ laws and to one or more foreign countries.
These are the six types of bankruptcies that you can file under. However, remember that bankruptcy is a complex process and it is best to get legal aid to help you out with it.