Bankruptcy comes in six different forms, which are given the names of the chapters of the US Bankruptcy Code that describe them. The only chapters that consumers are interested in are the first two- Chapter 7 and Chapter 13, which govern consumer debts, but for the sake of completeness, we’ve included a description of the rest.
[heading]Chapter 7 Liquidation[/heading]
Chapter 7, entitled “Liquidation,” is a procedure in which the trustee takes over the assets of the debtor’s estate, reduces them to cash, and “liquidates” them by distributing them to creditors (subject to the debtor’s right to retain certain exempt property). Chapter 7 is really for those who have no non-exempt assets to distribute, in which case there is no liquidation. These cases are called “no-asset cases.” An unsecured creditor will only receive a payment if the case is an asset case. At the conclusion of a successful Chapter 7 case (which normally takes about 3 months), the debtor receives a discharge that releases him or her from personal liability for dischargeable debts.
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If Chapter 7 sounds easy, that’s because it is. Unfortunately, not everyone qualifies to file under Chapter 7. To determine whether you qualify for a complete discharge, you need to take what is known as a “Means Test.” If you pass this test, you are eligible to for 7 relief.[/column] [column size=”1-2″ last=”1″] [box title=”SEE IF YOU QUALIFY” color=”#2e5599″]CLICK HERE to see whether you can pass the means test to qualify for a Chapter 7 discharge[/box] [/column]
[heading]Chapter 9 Adjustment of Debts[/heading]
Chapter 9 is called Adjustment of Debts of a Municipality. It’s not unlike a reorganization under Chapter 11, but only municipalities such as cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts can file under Chapter 9.
[heading]Chapter 11 Reorganization[/heading]
Chapter 11 entitled Reorganization, is usually filed by businesses that want to continue operating and repay creditors through a court-approved plan of reorganization. The chapter 11 debtor files a plan of reorganization with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court will either approve or disapprove the plan. If approved, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
Chapter 12 is entitled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income. As the name implies, it provides debt relief to family farmers and fishermen.
[heading]Chapter 13 Adjustment[/heading]
Chapter 13 is designed for an individual debtor who has a regular source of income and is able to pay all of his or her debts if given enough time. Chapter 13 enables the debtor to keep a valuable asset, such as a house. A debtor will propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test.
At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
The purpose of Chapter 15, entitled Ancillary and Other Cross-Border Cases, is to provide an effective mechanism for dealing with cases of cross-border insolvency. This publication discusses the applicability of Chapter 15 where a debtor or its property is subject to the laws of the United States and one or more foreign countries.
In addition to the basic types of bankruptcy cases, Bankruptcy Basics provides an overview of the Servicemembers’ Civil Relief Act, which, among other things, provides protection to members of the military against the entry of default judgments and gives the court the ability to stay proceedings against military debtors.
This publication also contains a description of liquidation proceedings under the Securities Investor Protection Act (“SIPA”). Although the Bankruptcy Code provides for a stockbroker liquidation proceeding, it is far more likely that a failing brokerage firm will find itself involved in a SIPA proceeding. The purpose of SIPA is to return to investors securities and cash left with failed brokerages. Since being established by Congress in 1970, the Securities Investor Protection Corporation has protected investors who deposit stocks and bonds with brokerage firms by ensuring that every customer’s property is protected, up to $500,000 per customer.
The bankruptcy process is complex and relies on legal concepts like the “automatic stay,” “discharge,” “exemptions,” and “assume.” Therefore, the final chapter of this publication is a glossary of Bankruptcy Terminology which explains, in layman’s terms, most of the legal concepts that apply in cases filed under the Bankruptcy Code.