Bankruptcy Law Explained

Types of Bankruptcy

[You do not need to study bankruptcy laws or to review this section if you have chosen to have us prepare your bankruptcy for you.]

Index:

Bankruptcy Law Summary
Chapter 7 bankruptcy laws
Chapter 13 bankruptcy laws
Property and Exemptions
Structure of bankruptcy laws
Case administration
Types of bankruptcy
How to file bankruptcy
 

The Five Types

There are five types of bankruptcy, Chapter 7, 9, 11, 12 and 13. Chapter 7, also called liquidation is the most common type of bankruptcy that individuals file. It is extremely popular because it provides for the absolute and complete elimination of most types of debt, thereby giving the debtor a true fresh start. The goal of a Chapter 7 bankruptcy is to obtain a court order discharging one's debts. Chapter 13 is the second most popular type of bankruptcy and it involves paying back your creditors under a court approved repayment plan. Chapter 11 is specially suited for corporations seeking to reorganize their debts while continuing to operate. Chapter 12 is for a family farmer and Chapter 9 is for cities and government bodies seeking to reorganize their debts. Chances are that you will be filing a personal Chapter 7 or Chapter 13 bankruptcy, since most individuals file under either Chapter 7 or Chapter 13. Unless you are behind on your mortgage, Chapter 7 is preferred over Chapter 13.

Chapter 7

Keeping in mind that our philosophy of  is to present legal information in to lay people in easy to understand language, this paragraph summarizes the essentials of Chapter 7 bankruptcy.

Chapter 7 bankruptcy also known as liquidation in the code and often referred to as straight bankruptcy or Personal Bankruptcy, is the most common type of bankruptcy. When people generically refer to bankruptcy or say they are declaring bankruptcy, they are most likely referring to Chapter 7 bankruptcy. Most law resources will begin a description of Chapter 7 by saying that the aim of the Chapter is to liquidate all non-exempt assets for the benefit of the creditors. While that is partially accurate, it misses a fundamental underpinning of the law which is that the fundamental purpose of Chapter 7 consumer bankruptcy is to protect insolvent debtors form creditors. Anyone can file a Chapter 7 bankruptcy and that includes businesses, companies and corporations.

The goal of Chapter 7 bankruptcy is to protect you the debtor from your creditors. If you are overburdened by debt, Chapter 7 bankruptcy is your friend, not your enemy.

When a person files Chapter 7, their goal is to wipe out most if not all of their debts. You file under Chapter 7 if your debts are largely unsecured or if you want to wipe out most of your debts and never repay them again. If your debts are mostly loans or credit cards and judgments, you would most likely want to file Chapter 7. Imagine that for six months or more you are suffering terribly under the heavy burden of debt and all of a sudden, all that load gets lifted off you and you are a free person. One person likened it to being declared not guilty after a long trial without bail. That is what debtors report experiencing when they file Chapter 7 bankruptcy.

Obviously, not everyone qualifies to file bankruptcy and if your qualify, there are limits on what assets you can keep and still discharge your debt. Imagine for a moment that you are a small time contractor and that you have just completed a remodeling job for a home owner. You have just been informed that the homeowner has filed bankruptcy and that you are not going to get any money for your work. You would certainly consider it unfair if the court allowed the homeowner to keep $120,000 in his bank account and a $58,000 Mercedes that was paid for while wiping out the $1,700 that you were owed. This fictional scenario obviates the need for laws governing what amount of property a person can keep after filing bankruptcy. Any amounts above the limits should be converted to cash and paid to the creditors. That is what exemption laws are about. Exemption laws specify limits for most categories of assets that you can keep after filing bankruptcy and it is the job of the trustee to liquidate any amounts above those limits for the benefit of the creditors. 

Laws dealing with declaring Chapter 7 bankruptcy can be found in Chapter 7 of the bankruptcy code (11USC). This chapter is divided into four subchapters. Subchapter 1 deals with the duties of the trustee as applied to a filing under Chapter 7, Subsection II deals with collection, liquidation and distribution of the bankrupt estate, Subchapter III deals with stockbroker liquidation and Subchapter IV deals with commodity broker liquidation.

Subchapter II (Section 721 through 728) is of particular importance to debtors because it deals with your right to operate a business while in bankruptcy, redemption of property, rights of partnerships, treatment of certain liens, disposition of property, the discharge of debts and certain tax provisions.

For a more detailed treatment of Chapter 7 bankruptcy laws, click the details link below.

Get Details - Chapter 7 Bankruptcy Laws

For information on the structure of the bankruptcy law, click the details link below.

Get Details - Structure of Bankruptcy laws

Chapter 13 

Chapter 13 is the second most popular type of bankruptcy. There are certain debt situations where a Chapter 7 bankruptcy is not in your best interest. In those situations, you want some breathing room to catch up with your payments. Chapter 13 is suited for those situations where you are best off paying off your debts but you need more time than your creditors will allow. Most people who file under Chapter 13 do so because they have fallen behind on their mortgage payments and are facing the possibility of foreclosure. In such situations, bankruptcy law allows debtors up to three years to pay up the arrearage while maintaining their regular payments. Contrary to popular belief, Chapter 7 is better in the long run for your credit since you can start re-building it after the discharge rather than waiting three years as is the case with Chapter 13.

Let us say that you were unemployed for six months and during that time you feel behind on your house payments and the mortgage company has demanded that you pay the $5,000 in back payment within 20 days or else they will foreclose. Under a Chapter 13 bankruptcy, the law allows you 36 months to pay off the $5,000 arrearage while you keep up the regular monthly payments. Obviously, you need to show evidence of sufficient income to pay both the regular payments and the new plan payments.

Chapter 13 laws can be found in Chapter 13 of the code (11USC). Since Chapter 13 bankruptcy is characterized by a repayment plan, this chapter deals mostly with the Plan. Sections 1301 to 1307 deals with such issues as rights of co-debtors, the trustee, the debtor's right to engage in business and the conversion and dismissal of cases. Sections 1321 to 130 deal with the repayment plan and covers filing the plan, contents of the plan, modifications, the confirmation hearing, plan payments, and a discharge of unpaid debts.

Should you declare Chapter 13 bankruptcy? That depends on the nature of your debts and on your objectives. If your debts are mostly credit cards and unsecured debts, file Chapter 7. If you are behind on your house payments and need several months to repay the arrearage, file Chapter 13. There are those who mistakenly think that Chapter 13 is better for their credit rating than Chapter 7. This notion is incorrect. In many ways Chapter 7 is better for your credit than Chapter 13. This is because when you file Chapter 7, your debts come to a halt immediately and you can begin rebuilding your credit immediately. Under Chapter 13, you cannot begin rebuilding your credit for three years which is the standard length of the Chapter 13 Plan. Most home loan programs allow you to qualify for a home loan two years after your bankruptcy is over, so with a Chapter 7 you could rebuild your credit three years sooner than with a Chapter 13 bankruptcy.

For a more detailed treatment of Chapter 13 bankruptcy laws, click the details link below.

Get Details - Chapter 13 Bankruptcy Laws

Chapter 9

Chapter 9 of the code deals with the bankruptcy of a municipality. This is not of much interest to debtors and so will not be discussed in detail. If you are a contractor owed money by a bankrupt city or county government, you will want to read Chapter 9 of the code.

Chapter 11

Like Chapter 7, Chapter 11 defines a type of bankruptcy filing. It is known in the code as Reorganization. This is the type of bankruptcy that corporations and large business file when they want to continue operating their business while getting debt relief. Theoretically, individuals can file Chapter 11 but hardly any of them do.

Chapter 11 is a very complicated type of bankruptcy and it usually requires the assistance of a team of attorneys and accountants. The initial documents required to file a Chapter 11 bankruptcy care pretty much the same as for a Chapter 7. It is the post-petition process and documentary requirements that are overwhelming. Chapter 11 bankruptcies are generally filed by corporate businesses because they are too complex for most people even when they are represented by attorneys. To start with, the court filing fee is over $800 and it is mandatory that corporations be represented by attorneys in bankruptcy.

The forms for a Chapter 11 are pretty much the same as for a Chapter 7 but the real problems is with what you have to do after you file. It is like a freight train and almost no one does this without an attorney. Do yourself a favor and hire an attorney and not just any attorney. In most large cities, only a few attorneys can handle a Chapter 11 and those that do usually charge over $10,000 to start.

Chapter 12

Chapter 12 of the code can be thought of as the Chapter 13 bankruptcy of the family farmer and since so few people file under Chapter 12, we shall skip a detailed discussion of it.

Business and Corporate Bankruptcies

Businesses can file either a Chapter 7 or a Chapter 11 bankruptcy but not a Chapter 13 bankruptcy. In most bankruptcy courts, it is mandatory that corporations be represented by an attorney. Chapter 11 bankruptcies are generally filed by corporate businesses because they are too complex for most people even when they are represented by attorneys.