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 personal 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 law 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, and take place in federal courts, 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
Type of Bankruptcy: Chapter 7 Liquidation
Chapter 7 bankruptcy is known as a liquidation bankruptcy. For most people, this is what you think of when you think about bankruptcy proceedings. Under this kind of liquidation bankruptcy, everything you have an ownership interest in comes within a bankruptcy estate, which is administered by a court-appointed bankruptcy trustee, and you get to keep property you can exempt. Also, it’s under this type of bankruptcy filing that most people seek to discharge unsecured debt, as well as personal liability under secured debt.
It’s rare for an unsecured creditor to make an appearance in a chapter 7 case. Unless there may be some kind of allegation of bankruptcy fraud, you rarely see an unsecured creditor appear or otherwise file anything in a chapter 7 case.
It’s important to keep in mind how secured debt is handled in the chapter 7 bankruptcy proceeding. Although a discharge means that a secured creditor cannot sue you personally for the debt, the discharge does not alter the rights of a secured creditor in connection with the property. The secured debt remains collateralized by the property (like a car or a house), and whatever rights the secured creditor may have had before your bankruptcy filing they will still have after the bankruptcy process comes to a close with upon the entry of the bankruptcy discharge.
Some people also file for chapter 7 bankruptcy relief for a small business bankruptcy. It would be wise to really tread with caution if you’re seeking bankruptcy protection for a business bankruptcy. One thing to keep in mind is that only individuals are entitled to a discharge in a chapter 7 bankruptcy, not entities. So if a business files for bankruptcy relief under chapter 7, it will not change the money the business owes. Additionally, the bankruptcy trustee will often request to see lots of detailed documents, both of the business and of the individuals behind the business. Business entities should generally limit filing a bankruptcy petition under chapter 11 bankruptcy.
Type of Bankruptcy: Chapter 9 Municipalities
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.
Type of Bankruptcy: Chapter 11 Reorganzation of Debts
Chapter 11 bankruptcy is reorganization of debts, and this is commonly used for business bankruptcy. In chapter 11 bankruptcy, the hope is to create a plan of reorganization where, by reorganizing debt of the company, creditors may receive some payments and the company can continue to operate.
For smaller businesses, there is an expedited small business bankruptcy path under chapter 11. There are certain requirements to take advantage of this small business bankruptcy filing, so be sure to speak with a bankruptcy lawyer to see if your case can fall under this type of reorganization bankruptcy.
Type of Bankruptcy: Chapter 12 Family Farmers and Fisherman
Chapter 12 bankruptcy is a form of bankruptcy that is specifically reserved for family farmers and fishermen, and is a repayment plan.
Type of Bankruptcy: Chapter 13 Repayment for Individuals with Regular Income
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 (who must have regular income) proposes to pay some amount of their disposable income back to their creditors over a 3 – 5 year repayment plan with a monthly payment to the chapter 13 bankruptcy trustee. Keep in mind that there are debt limits for both unsecured debt and secured debt in chapter 13 cases, and also that chapter 13 is bankruptcy for individuals – corporations cannot file for chapter 13. Depending on the types of debt you have, chapter 13 bankruptcy filings may offer greater flexibility.
There are lots of different factors that come into a chapter 13 case. Some general things to keep in mind is that what you have to pay over the life of a plan may not just be based on your disposable income, but also what property you may protect with the bankruptcy exemption. You are expected to pay the dollar value of property you have an interest in that you cannot protect with a bankruptcy exemption in your chapter 13 repayment plan. For instance, if you owe $100,000 in unsecured debts, but you have a house with $50,000 in equity above and beyond any bankruptcy exemption you can use, you will be expected to pay at least $50,000 in your chapter 13 plan if you want to keep the house, regardless of your income.
Type of Bankruptcy: Chapter 15 International Bankruptcy
The final type of bankruptcy is chapter 15 bankruptcy is relevant for international bankruptcy issues, and is reserved for dealing predominantly with entities that file for bankruptcy that spans across countries.
How Do I Choose Which Chapter I Am Filing Bankruptcy Under?
Any bankruptcy filing starts with filing a bankruptcy petition in the appropriate bankruptcy court. The voluntary bankruptcy petition is a simple, 7-page application where you would put your name (or business name), address, and some other general details about the case (such as whether you’ve operated as a sole proprietor, whether you’ve completed the credit counseling course, and whether you possess any hazardous property).
One of the questions plainly asks under what chapter are you filing bankruptcy. All you have to do is check off one of the options. When the case is filed in the bankruptcy court system, you will select that chapter option. This is how you choose the chapter under which you are filing for bankruptcy protection.
Consumer Bankruptcy Differences: Chapter 7 vs Chapter 13
Most consumer bankruptcy cases are filed as either a chapter 7 or chapter 13 case. Depending on your circumstances, one may be a better fit for you than the other. Here are just a few of the differences in the common consumer bankruptcy cases filed under chapter 7 vs chapter 13.
- Debt Limits: In a chapter 7 bankruptcy proceeding, there are no debt limits. A person can file for bankruptcy relief whether they have $1,000 in debt, or if it’s $1,000,000 in debt. The chapter 13 bankruptcy process, however, is subject to debt limits. There is a debt limit for both unsecured debt as well as secured debt in a chapter 13 case. A debtor filing bankruptcy under chapter 13 must pass BOTH debt limits. If not, either the bankruptcy court, the bankruptcy trustee, or a creditor may file a motion to dismiss your case.
- Repayment Plan: The biggest difference between chapter 7 and chapter 13 is that in chapter 7 there is no expectation that you will pay any of the debt back (it is liquidation bankruptcy, after all), while the premise of a chapter 13 case is that you will propose a repayment plan where you agree to make a monthly payment to the chapter 13 trustee to go towards your debts.
- Time for Bankruptcy Discharge: Chapter 7 bankruptcy proceedings are much faster than chapter 13 bankruptcy proceedings. The chapter 7 bankruptcy process is usually over about 90 – 120 days after the petition is filed.
What About Credit Counseling and Debtor Education Courses?
Keep in mind that if you are looking to file bankruptcy, regardless of the chapter under which you decide to file, you will have to complete the credit counseling course and debtor education course for any bankruptcy proceeding. Those courses are expected to help you craft a budget by examining your credit card debt, student loans, any mortgage payments, etc. and come up with a proposed debt management plan.
In a limited number of exceptions, you can file for bankruptcy protection without having completed the credit counseling course if you can demonstrate something approaching an undue hardship.
If You Want to Know Which of the Different Types of Bankruptcies You Should File, Then You Should Contact the Law Office of Richard Kistnen Today
As you can see, there are different types of bankruptcies. The goal of bankruptcy law is to balance the interests of creditors with the debtor’s right to debt relief and a financial fresh start from a bankruptcy discharge 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 or someone that operates as a sole proprietorship is probably not going to work for a chain business. Just keep in mind that there are different types of bankruptcies, and a bankruptcy lawyer, like Richard Kistnen, can evaluate your specific situation and determine which type of bankruptcy is right for you.
Filing bankruptcy can help with things that you may not have thought, including tax debt. Also, many people report see a jump in their credit score after filing their case.
If you’re struggling to pay things like credit cards, debt consolidation loans, or other payments to creditors; or maybe your credit report looks like a horror story; or if you might be facing a wage garnishment, foreclosure, or some other legal action or collection activity, and you would like to discuss chapter 7 bankruptcy with an experienced bankruptcy attorney, please click here to book your confidential, no-obligation consultation, or reach out to the Law Office of Richard Kistnen using the contact info below.