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  • Jill Russell

The Different Flavors of Bankruptcy

A bankruptcy debtor receives a fresh start through the discharge of his or her debts, which releases the debtor from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.

There are six basic types of bankruptcy cases are allowed under the Bankruptcy Code, each of which is described below. The cases are traditionally given the names of the Chapters that describe them.

Chapter 7

Chapter 7 of the Bankruptcy Code, outlines an orderly, court-supervised procedure whereby a trustee takes control of the debtor's assets, reduces them to cash (sells the assets that are not exempt), and then distributes the cash to creditors. A creditor with an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court.

In most Chapter 7 cases, if the debtor is an individual, they receive a discharge that releases them from personal liability for certain dischargeable debts. The discharge is usually received within a few months after the petition is filed with the bankruptcy court. A "means test" was instituted after the Bankruptcy Code was amended in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act. The "means test" is used to determine whether individual consumer debtors qualify for relief under Chapter 7. If the debtor's income is higher than a certain threshold (determined by the state of residence), the debtor may NOT be eligible to file Chapter 7 bankruptcy.

Chapter 9

Chapter 9 of the Bankruptcy Code is entitled Adjustment of Debts of a Municipality, and provides for the reorganization of a "municipality" - which includes entities such as:

  • Cities

  • Towns

  • Villages

  • Counties

  • Taxing Districts

  • Municipal Utilities

  • School Districts

Chapter 11

Chapter 11 of the Bankruptcy Code, titled Reorganization, is what is used by companies. It allows them to continue operating as a business while repaying their creditors through a court-approved reorganization plan.

Under a court-approved Chapter 11 reorganization plan the company can:

  • Reduce their debts by repaying a portion of the obligations and discharging others;

  • Terminate burdensome contracts and leases;

  • Recover assets; and

  • Rescale operations in order to return to profitability.

The debtor typically goes through a period of consolidation and emerges with a reduced debt load and a reorganized business structure through Chapter 11.

Chapter 12

Chapter 12 of the Bankruptcy Code is titled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, provides bankruptcy protection to family farmers and fishermen.

Similar to a Chapter 13 bankruptcy, a Chapter 12 case allows the debtor to propose a plan to repay debts over a period of time - no longer than 3-5 years. There is also a trustee appointed in every Chapter 12 bankruptcy, whose duties are similar to those of a Chapter 13 trustee.

The Chapter 12's trustee disbursement of payments to creditors under a confirmed plan parallels the procedure outlined below for Chapter 13. Chapter 12 also allows the family farmer or fisherman to continue operating his or her normal business while the repayment plan is being carried out.

Chapter 13

Chapter 13 of the Bankruptcy Code, Adjustment of Debts of an Individual with Regular Income, is created to be used by an individual (or couple) who has a regular source of income.

If the debtor has significant assets that they do not want to lose - such as a home, Chapter 13 can often be preferable to Chapter 7 bankruptcy. Similar to Chapter 12 above, Chapter 13 bankruptcy allows a debtor to propose a "plan" to repay creditors over time - typically within 3-5 years.

Chapter 13 can be used by consumer debtors who are disqualified from Chapter 7 bankruptcy via the means test. The court will either approve or disapprove the debtor's repayment plan at a confirmation hearing - the result will depend on whether the plan meets the Bankruptcy Code requirements for confirmation.

Chapter 13 is different from Chapter 7 bankruptcy, in the sense that the Chapter 13 debtor typically remains in possession of the property of their estate and make payments to creditors, via the trustee, based on the debtor's anticipated income over the length of the plan. The debtor does NOT receive an immediate discharge of debts, unlike Chapter 7 bankruptcy. Rather, the debtor must complete his or her repayments under the plan prior to discharge being granted.

Similar to Chapter 7 bankruptcy, the debtor in a Chapter 13 bankruptcy is protected from lawsuits, garnishments and other creditor actions while the plan is in effect. The discharge is also broader in the sense that more debts are eliminated under Chapter 13 than under Chapter 7.

Chapter 15

Chapter 15, titled Ancillary and Other Cross-Border Cases, was created to provide an effective system for dealing with cases of insolvency that occur in a cross-border capacity.

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