Our Bankruptcy Attorney Blog

In the United States, all bankruptcy filing fall under federal law and the federal government offers six different varieties of bankruptcy. However, of these the overwhelming majority of personal filings are either Chapter 7 or Chapter 13 bankruptcies, while the majority of business filings are either Chapter 7 or Chapter 11 bankruptcies. The remaining options are less commonly used, but still available to qualifying people and entities.

Basic, or “straight”, bankruptcy refers to Chapter 7 bankruptcy. This is where a debtor’s non-exempt assets are liquidated and the proceeds given to the creditors while the remaining debt is largely discharged. This is what most people think of when they think of bankruptcy in general. Most personal property that is necessary for living and making a living (employment) is exempted from liquidation. This is by far the most common form of bankruptcy filed and also the least expensive and simplest option available. Although it remains the most common option, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made it more difficult to file for and taken away many of the benefits of this form of bankruptcy.

Chapter 13 bankruptcies are the more popular option for people with a lot of assets that would not be exempted from liquidation under a Chapter 7 bankruptcy. It typically only applies to professional people with a steady income, which is why it is frequently called “Wage Earner Bankruptcy”. No debt is actually discharged under a Chapter 13 bankruptcy; instead the court implements a strict debt restructuring agreement. Under this agreement, the creditors are forbidden from collection efforts outside of the agreed to terms of the Chapter 13 debt restructuring. However, should the debtor fail to meet his or her obligations under the Chapter 13 restructuring, the whole plan is usually thrown out and the creditors are allowed to pursue the debtor.

Chapter 11 bankruptcy is best known as “corporate bankruptcy” and primarily amounts to a comprehensive reorganization of the entire bankrupt entity. This option is most popular for large corporations since it allows them to continue operating while allowing the courts to design a workable debt repayment scheme to be followed. Some individuals, especially those with large numbers of debts and assets and complex investments, also file Chapter 11 bankruptcy. Such reorganization schemes tend to be very expensive and complex, so the only individuals dealing with this form of bankruptcy tend to be high net worth ones (people with more than a $1 million in investable financial assets, excluding real estate).

The three types of bankruptcy described above account for more than eighty percent of American bankruptcies, but there are other forms as well:

Chapter 12 bankruptcy is a special form of personal bankruptcy that is allowed to family farmers and fishermen in the United States. Though the qualifications are tighter, the benefits are also better for the bankrupt farmer or fisherman under a Chapter 12 bankruptcy.

Chapter 15 bankruptcy primarily deals with foreign, or non-U.S., debtors that owe money in the country. Primarily this is used for American branches of foreign corporations or financial entities (banks, insurance companies, et cetera). These can be extremely complex cases since frequently international treaty law comes into play.

Chapter 9 bankruptcy applies solely to American municipalities – local, city, or county governments that go bankrupt. As an internal government matter, the average person has little, if anything, to do with Chapter 9 bankruptcy.

Tags: bankruptcy

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