Bankruptcy is a legal process to assist individuals and businesses with debt problems. Qualifying debtors can either eliminate certain types of debt or repay their debt under the court approved repayment plans.
The concept of bankruptcy law is deeply rooted in our American system and even written into our U.S. Constitution, Article 1, Section 8. In 1978, Congress codified the bankruptcy laws into what is known as the Bankruptcy Code (title 11 of the United States Code). Then, in 2005, former president George Bush signed into law the extremely unpopular bankruptcy reform Act called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). As a result, discharging debt in bankruptcy has become much more complex with far more regulations and rules. So much so the U.S. Bankruptcy Court strongly recommends individuals hire a competent attorney rather than represent themselves.
Chapter 7 Bankruptcy (liquidation or straight bankruptcy) is a court-supervised Bankruptcy Process where an appointed trustee liquidates, i.e. sells, all of the debtor’s nonexempt property and distributes any proceeds to the debtor’s creditors. If there are no assets after the exemptions have been taken, then the case is considered a “no-asset” case in which the unsecured creditors receive nothing.
After discharge, the debtor is released from personal liability for any discharged debts however BAPCA has made it more difficult to obtain a discharge. Among other things, individuals are now required to pass a “means test” to determine whether he or she qualifies for relief. There are two mandatory credit counseling sessions as well as potential audits. If the debtor’s income exceeds the threshold amounts allotted by the Means Test, then a chapter 7 is not an option, leaving the debtor to file a Chapter 13.
Chapter 9 Bankruptcy
Chapter 9 is a reorganization plan (much like a chapter 11) limited to municipalities like cities, towns, villages, counties, municipal utilities, and school districts. After losing $1.7 billion in investment pools, Orange County, California filed a Chapter 9 in 1994.
Chapter 11 Bankruptcy
Chapter 11 is a reorganization plan typically filed by businesses that want to continue operating business and repay creditors through a court-approved plan. The chapter 11 debtor files a plan of reorganization and must provide creditors with a disclosure statement containing information sufficient to enable creditors to evaluate the plan. The court ultimately confirms or disapproves. If confirmed, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also cancel onerous contracts and leases, recover assets, and reorganize its operations in order to return to profitability. The debtor typically goes through a period of consolidation and ends up with a reduced debt and a reorganized business.
Chapter 12 Bankruptcy
Chapter 12 is a bankruptcy plan for industry specific companies such as farmers and fishermen. It operations much like a chapter 13 repayment plan.
Chapter 13 Bankruptcy (also known as a wage earner’s plan) is a repayment plan intended for individual who have a regular source of income. Often, if you don’t qualify for a chapter 7 due to income, you can qualify for a chapter 13. The benefit of a chapter 13 is that you can keep all your assets, e.g. houses, boats, vehicles, and repay creditors over time, typically 3-5 years and remain protected from lawsuits, garnishments and other actions while you’re in the plan. This discharge is also broader i.e., more debts can be discharged under chapter 13 than the discharge under chapter 7.
Chapter 15 Bankruptcy
Chapter 15 applies to the cross-border cases, where a debtor or its property is subject to our U.S. laws and one ore more foreign countries.