In the United States there are six types of bankruptcy, as outlined by Title 11 (aka the Bankruptcy Code) of the United States Code. While only a couple of these six types are most commonly used, it can be interesting and helpful to be educated about all the different types, known as “chapters.” Here is some information about the six different chapters of bankruptcy:
The most common out of the six types, Chapter 7 bankruptcy governs the process of liquidation. Liquidation is the process by which a company or person’s assets are redistributed or dissolved, and can be either voluntary or compulsory. When a business files for Chapter 7 bankruptcy, a trustee is appointed to oversee the liquidation process. The trustee determines which of the company’s debts are binding and which creditors must be paid, versus relationships which will simply be dissolved.
When an individual files Chapter 7 bankruptcy, he or she is allowed to keep certain property exempt from liquidation. Certain types of debt do not qualify as allowable exemptions, including home mortgage, child support, and student loans.
Chapter 9 bankruptcy is available exclusively to municipalities. Historically, if a municipality was unable to pay its debts, certain measures were taken, such as raising taxes. Chapter 9 bankruptcy was created during the Great Depression, when raising taxes did little to improve a municipality’s situation. In some places, a municipality must seek state approval before filing Chapter 9 bankruptcy. The two most famous Chapter 9 cases were Jefferson Count, AL, and Orange County, CA.
This form of bankruptcy is available to both businesses and individuals, but it is most commonly used by corporations. Unlike the liquidation process of Chapter 7, with Chapter 11 the debtor remains largely in control of assets. Rather than having a trustee in charge, the debtor retains control under supervision from the court. Chapter 11 is geared primarily toward reorganizing a business. With the restructuring measures, however, ownership of parts of the business and rights to revenue can be passed out of the debtors’ hands and to the creditors.
Similar to Chapter 13, which will be discussed below, Chapter 12 bankruptcy applies solely to farmers and fishermen. Originally, there were not any specific provisions for these agricultural professionals. Addendums and modifications were added several different times, with repeated expiration and renewal, until a permanent chapter was created in 2005.
Unlike Chapter 7, which liquidates assets and offers immediate debt release, Chapter 13 is considered more of a debt rehabilitation. It is similar to Chapter 11 in that reorganization and restructuring of assets is involved. The debtor creates a plan to pay off all creditors in 3-5 years. Chapter 13 may not work for everyone because requires a certain level of disposable income to fund the bankruptcy plan.
This type of bankruptcy involves cases in which assets are spread across more than one country. The provisions outlined in Chapter 15 bankruptcy help mitigate issues caused by cross-border litigation. In these cases, the U.S. courts can choose whether or not to provide additional assistance to aid an individual involved with a foreign law proceeding.