What are the different types of bankruptcies?
Bankruptcy appears in the news quite a bit, especially in today’s COVID-19 climate. Particularly chain businesses have closed down and filed for bankruptcy. That kind of bankruptcy, however, is usually different from the kind of bankruptcy case that most people will file. So, what are the different types of bankruptcies?
Before looking at the different types of bankruptcies, it makes sense to start with where bankruptcy cases come from. The source of bankruptcy cases is found in federal law, Title 11 of the United States Code. This entire group of laws is commonly known as the Bankruptcy Code.
While the source and framework for bankruptcy cases is found in federal law, almost each and every bankruptcy case is intertwined with state laws, especially when it comes to what property someone can exempt. So almost every bankruptcy case has to be looked at both through federal laws and state laws.
The Bankruptcy Code
When you look at the Bankruptcy Code, it is broken down into different chapters – chapter 1, chapter 3, chapter 5, chapter 7, chapter 9, chapter 11, chapter 13, and chapter 15. Each chapter of the bankruptcy code represents a different grouping of laws that affect a specific thing in bankruptcy cases.
Chapter 1 of the bankruptcy code is where you will find definitions and general rules and provisions. Particularly important from chapter 1 of the bankruptcy code tends to be Section 109 – Who May Be A Debtor.
Chapter 3 of the bankruptcy code is where you will find much of the rules and procedure for a bankruptcy case. Likely most important in chapter 3 of the bankruptcy code is the Automatic Stay, one of the biggest protections in bankruptcy cases, and why many people file for bankruptcy to begin with. The Automatic Stay is an automatic injunction on the enforcement of a debt against someone that files for bankruptcy. This can be found in Section 362 of the Bankruptcy Code.
Chapter 5 of the bankruptcy code is where the rights and remedies of debtors, creditors, and the bankruptcy estate are defined. Everything from federal bankruptcy exemptions to priority claims are found and defined in chapter 5 of the bankruptcy code. Most lawsuits in a bankruptcy case are based on chapter 5 of the bankruptcy code.
Different Types of Bankruptcies
Chapter 7 and on is where the bankruptcy code defines the different types of bankruptcies. Each of the next few chapters lay out the rules and procedures for that specific type of bankruptcy, including who may obtain a discharge under that chapter.
Chapter 7 bankruptcy is liquidation. For most people, this is what you think of when you think about bankruptcy. Under chapter 7, everything you have an ownership interest in comes within a bankruptcy estate, and you get to keep property you can exempt. Something to keep in mind is that only people are entitled to a discharge in a chapter 7 bankruptcy, not entities.
Chapter 9 bankruptcy is bankruptcy for municipalities. If a city or town is to file for bankruptcy, the rules and procedures are found here in chapter 9 of the bankruptcy code.
Chapter 11 bankruptcy is reorganization of debts, and this is the bankruptcy that is popular on the news for businesses. In chapter 11 bankruptcy, the hope is to create a plan where, by reorganizing debt of the company, creditors may receive some payments and the company can continue to operate.
Chapter 12 bankruptcy is specifically reserved for farmers and fishermen, and is a repayment plan.
Chapter 13 bankruptcy is another type of bankruptcy case that is common among people that are not farmers or fishermen. Chapter 13 bankruptcy is a repayment plan, where the debtor proposes to pay some amount back to their creditors over a 3 or 5 year period. Keep in mind that there are debt limits in chapter 13 cases, and also that only people can file for chapter 13 bankruptcy cases.
The final type of bankruptcy is chapter 15 bankruptcy, which deals predominantly with entities that file for bankruptcy that spans across countries.
As you can see, there are different types of bankruptcies. Each kind of case is designed for a particular type of debtor, and each intended to achieve a unique outcome. The bankruptcy case that’s good for a chain business may not be suitable for an individual. Likewise, the bankruptcy case that may be good for an individual is probably not going to work for a chain business. Just keep in mind that there are different types of bankruptcies, and your specific situation will determine which type of bankruptcy is right for you.
If you would like to discuss bankruptcy, please reach out to the Law Office of Richard Kistnen using the contact info below.