There are 6 different types of bankruptcy according to the United States Bankruptcy Code. Each one of them is named after the chapter in the code where it is described. Hence, we have the following bankruptcy types: Chapter 7 (liquidation), Chapter 9 (adjustment of debts of a municipality), Chapter 11 (reorganization), Chapter 12 (adjustment of debts of a family farmer or fisherman with regular annual income), Chapter 13 (adjustment of debts of an individual with regular income) and Chapter 15 (ancillary and other cross-border cases). These chapters apply to different circumstances and entities. The most common bankruptcy types people usually resort to are Chapter 7 and Chapter 13 for individuals and Chapter 7or Chapter 11 for companies. In this post, we are going to summarize the most common aspects related to each bankruptcy option.
Chapter 7 Bankruptcy is typically a company?s last resort when the business has no chance to survive. This process is also known as liquidation. A business normally files for Chapter 7 when it has debts that can no longer be restructured. Moreover, a debtor that is about to file for this type of bankruptcy is usually lacking significant assets.
If the effort to reorganize the company exceeds the owner's capabilities, Chapter 7 is an appropriate choice. In this bankruptcy form, a court-appointed trustee will be in charge of canceling the company's debts by selling its assets and distributing the money among creditors.
After all the debts are covered, a sole proprietor will usually be discharged which means that he or she will be released from liability regarding their debts. If a corporation or a partnership is filing for Chapter 7, they can't be discharged. However, it's important to keep in mind that not all debts can be discharged and a lien on property is not canceled after the discharge.
Chapter 7 is the most popular type of bankruptcy among individuals who get the change to start anew after filing. This chapter is the most convenient solution when the debtor has no possibility of repaying the money he or she owes, there are no cosigners and the creditors' legal action is impending. The process is similar for individuals; their nonexempt assets are collected, turned into cash and the money is then divided among creditors according to the provisions of the Bankruptcy Code. Typically, at the end of the procedure, the debtor will be discharged and he or she will no longer be personally liable for the remaining dischargeable debts.
Chapter 11 bankruptcy is usually preferred over other bankruptcy forms when there is still hope of getting the business back on track. In this chapter, the aim is to help the company recover through reorganization.
Chapter 11 ensures business continuity during the bankruptcy process. Under this chapter, the court might appoint a trustee. But most of the times, the business owner is allowed to continue operating the business as a debtor in possession (DIP). This bankruptcy form is carried on according to a reorganization plan which is filed by the debtor. In this plan, the company describes how it is going to repay its creditors. If the trustee?s committees have been appointed, they will represent the creditors? interest and help the debtor develop the plan. The plan will be reviewed by the creditors whose vote is required. The plan also requires the court's approval in order to be implemented. This process might take a while; sometimes companies have to wait for more than a year to receive the approval.
After the plan is validated, the debtor can start reorganizing the business by keeping its essential assets and paying creditors out of the profit they continue generating. Even if the court approves the reorganization plan and the debtor continues managing his or her company, any major business decision they want to implement will also require the court's approval.
Any business entity is entitled to file for this bankruptcy chapter and they usually choose it when their debts exceed the limits established by Chapter 13 ($1,184,200 for secured debts and $394,725 for unsecured debts). Typically, big companies opt for this chapter. The reason why small businesses avoid it is that it costs too much to obtain the plan approval. Moreover, it often takes a long time for the process to wrap up; somewhere between 6 months and 2 years.
After a Chapter 11 bankruptcy is completed, companies typically gain the advantage of reduced debts and newly organized business. Although Chapter 11 is commonly used by companies, it is also available for individuals.
This bankruptcy chapter is a reorganization form available for consumers. This option helps people who earn a regular income pay off their debt. Chapter 13 bankruptcy is governed by a repayment plan which the debtor must file and the court must approve. This plan contains the course of action that the debtor will take in order to repay his or her debts. The amount of money the debtors has to pay back varies based on their revenue, their debts and the property they possess. Under this chapter, the debtors get 3 to 5 years to pay back the money they owe. After the plan is approved by the court, the debtor starts paying creditors through a trustee. Once the approval is obtained, the creditor is granted protection and creditors will no longer be able to pursue a lawsuit against him or her. After the plan is completed, the debtor is discharged of the remaining debt. Chapter 13 is also available for those who own a sole proprietorship. Some of the advantages of chapter 13 are:
- the debtor's ability to save their house from foreclosure
- the possibility to reschedule and extend secured debts
- the protection granted to third parties, like co-signers, who are responsible for consumer debts
- the lack of direct contact between debtor and creditors; debtors send the payments to the trustee who then pays the creditors
Chapter 13 is also useful when the debtor has certain debts that can't be discharged through Chapter 7 like taxes or child support, liens that exceed the value of their assets. This bankruptcy type is also appropriate when debtors fail to file their taxes or to cover their house expenses for a considerable period.
Chapter 12 is a peculiar type of bankruptcy option; it is available to a restricted domain of activity; small farming or fishing companies. This chapter enables family enterprises that activate in these domains to restructure their business and avoid liquidation. Chapter 12 functions similarly to Chapter 13. Some of the benefits entailed by this chapter are:
- most companies can continue their business operations after they've filed for Chapter 12
- although a trustee is appointed, their duties are restricted; checking documents, monitoring operations, plan payments collection and disbursement
- companies filing for this chapter have 90 days to come forward with a repayment plan and the deadline can sometimes be extended
- the debtor gets 3 to 5 years to pay off his or her debts
- debtors can benefit from a cram down for their secured debts
Chapter 9 Bankruptcy is available for municipalities such as cities, towns, villages, counties, taxing districts, municipal utilities or school districts that require reorganization. This chapter aims to support municipalities that are faced with financial difficulties and protect them from creditors. The municipality filing for chapter 9 will develop and implement a plan to help it adjust debts. There are three common methods adopted by municipalities that try to reorganize their debts: getting longer debt maturities, accessing a new loan to refinance the debt or getting an interest reduction. Unlike other bankruptcy types, Chapter 9 bankruptcy doesn't involve assets liquidation and distribution among creditors. Chapter 9 Bankruptcy is only available for municipalities that are authorized to be a debtor, insolvent and willing to implement a debt adjustment plan.
Chapter 15 is a relatively new form of bankruptcy; it has been available since 2005 and it enables foreign debtors to file for bankruptcy under the US laws. This chapter is basically an adoption of the international bankruptcy laws provided by the United Nations Commission on International Trade Law. Few cases are filed annually under this chapter.
Chapter 15 has been added to the Bankruptcy Code to ensure coordination for cross-border insolvencies and to provide a faster and more efficient means of solving them. To commence this procedure, a petition is filed by an appointed foreign representative for the recognition of the foreign proceeding. After the court hearing, the foreign proceeding is recognized, and the representative can seek relief.
To understand all the benefits and drawbacks of each bankruptcy chapter and how they can affect your business or your personal estate, you should talk to a lawyer who specializes in this area. An expert will help you choose the most appropriate procedure based on your necessities.
At the Law Offices of Kevin S. Neiman, we have the necessary experience and expertise to help you file any bankruptcy chapter. We will guide you every step of the way and makes sure you get the best outcome. You can contact our specialists by calling us or visiting our office in Denver.