Most clients who come into our office seeking bankruptcy-related services are familiar with the term “bankruptcy.” We have noticed, however, that many people are initially confused about the differences in the various bankruptcy chapters. That is not surprising because there are six different bankruptcy chapters in the United States. Each chapter serves a different purpose and encompasses its own rules and requirements.
To assist in understanding the purpose of the different bankruptcy chapters, a very brief overview of each chapter is set forth below:
Chapter 7 is the most common type of bankruptcy filed in the United States. Individuals, including married couples, as well as businesses, can file a chapter 7. There are income limitations, however, restricting individual chapter 7 filings.
A chapter 7 is sometimes referred to as a liquidation bankruptcy because a trustee is appointed who will liquidate all assets and distribute the money to creditors. The exception to this complete liquidation is that individuals are permitted to retain certain exempt property, which is often, but not always, all of their property. In those cases, creditors receive nothing.
At the end of the bankruptcy case, individuals typically receive a discharge, which relieves them from being legally obligated to pay most pre-petition debts. Exceptions to discharge exist for certain debts such as taxes, student loans, fines, and domestic support obligations. Liens on property may still be enforced after the bankruptcy even though the underlying debt may have been discharged.
Chapter 9 is a bankruptcy for municipalities- cities, towns, counties, etc.
Chapter 11 is a reorganization bankruptcy. Chapter 11 is most often used to reorganize businesses, but chapter 11 is also available to individuals, including married couples. Nevertheless, individuals do not tend to file chapter 11 bankruptcies unless they are over the debt limitations of a chapter 13 bankruptcy.
In a chapter 11 bankruptcy, the debtor remains in control and is not required to sell assets. Instead, the debtor can develop a plan to pay its debt while remaining in business. Creditors then have an opportunity to vote on the plan proposed by the debtor.
Chapter 12 is only available to family farmers and family fisherman. The debtors develop a plan to pay some or all of their debt with future earnings. If the court approves the plan, the debtors make their plan payments as adjusted by the plan. After the payments are made, most remaining debts are discharged with the exception of certain debts that are not dischargeable.
Chapter 13 is a voluntary reorganization for individuals, including married couples, with regular income. The debtors develop a plan to pay some or all of their debt with future earnings by way of monthly payments over a period of three to five years. If the court approves the plan, the debtors make their plan payments as adjusted by the plan. After all payments are made, most remaining debts are discharged except certain debts that are not dischargeable such as domestic support obligations, student loans, and taxes.
To file a chapter 13 bankruptcy, debtors must have less than $1,184,200 in secured debt and less than $394,725 in unsecured debt. Many debtors file a chapter 13 to avoid foreclosure on their homes. People also tend to file chapter 13 if they are over the income limitations for a chapter 7 bankruptcy or have assets that could be sold in a chapter 7 bankruptcy.
Chapter 15 is a method of recognizing international bankruptcy cases in the United States. A foreign debtor who has assets in the United States may file a chapter 15 bankruptcy to administer those assets or act on behalf of the debtor in the United States.
This article is merely a brief overview of the different chapters of bankruptcy. Each chapter contains its own rules and requirements, most of which are not set forth in this article. You should consult an experienced attorney to determine which chapter would work best for you.
The attorneys at Leech Tishman are experienced attorneys and offer a free consultation. Give us a call at 412.261.1600, and we can determine if bankruptcy is an option for you.