Bankruptcy relief offers consumers a fresh start in life and eliminates most debts, including mortgages, car loans, credit cards, medical bills, personal loans, payday loans, and more. Best of all, consumers are allowed to retain all unencumbered exempt property. LexLawLawyers can help you.
The Bankruptcy Code provides six basic types of bankruptcy cases. Each type of bankruptcy case is codified in a distinct “chapter” of the Bankruptcy Code. 11 U.S.C. § 101 et seq. Each type of bankruptcy case is identified by the Bankruptcy Code “chapter” number that contains the substantive bankruptcy law applicable to that respective type of bankruptcy case. For example, the substantive bankruptcy laws relating to a “Chapter 7” bankruptcy case are contained in Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 701 et seq. The substantive laws relating to a “Chapter 13” bankruptcy case are contained in Chapter 13 of the Bankruptcy Code. 11 U.S.C. § 1301 et seq.
Each of the six basic types of bankruptcy cases is outlined below, but only Chapter 7 is discussed at length later. The entity seeking bankruptcy protection is called the “debtor.” A Chapter 7 debtor can be either a human (filing individually or jointly with a spouse) or non-human such as a corporation, partnership, or limited liability company (LLC).
Chapter 7 is titled “Liquidation” but colloquially called “bankruptcy” or “straight-bankruptcy.” Chapter 7 cases are the most common type of bankruptcy case. Chapter 7 relief may be sought by both individuals and non-individuals such as corporations, partnerships, and limited liability companies (LLC). Amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) require the application of a “means test” to determine whether an individual consumer debtor financially qualifies for Chapter 7 relief. If a debtor’s income exceeds certain thresholds, the debtor may not be eligible for Chapter 7 relief and may have to seek relief from another bankruptcy chapter, typically Chapter 13.
A Chapter 7 case is technically called a liquidation case because the Bankruptcy Code contemplates an orderly, court-supervised liquidation procedure by which a trustee takes possession of the assets of the debtor’s estate, reduces the assets to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is typically little or no non-exempt property in most Chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. Such a case is called a “no-asset” case and the debtor retains all unencumbered assets. A creditor holding an unsecured claim will get a pro-rata distribution from the bankruptcy estate only if the case is an “asset-case” and the creditor files a timely proof of claim with the bankruptcy court.
In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him/her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the bankruptcy petition is filed. Non-individuals are not issued a discharge. The debtor is protected by the discharge injunction after the discharge order is entered.
Chapter 13 is titled “Adjustment of Debts of an Individual with Regular Income.” These cases are colloquially called “wage-earner” cases or simply “Chapter 13” cases. Chapter 13 is the second most common type of bankruptcy case after Chapter 7. Chapter 13 is designed for an individual debtor(s) who has a regular source of income. Corporations, partnerships, and limited liability companies (LLC) are not eligible for Chapter 13 relief. Chapter 13 is often preferable to Chapter 7 because it enables a debtor to keep valuable assets, such as a house and vehicle, and because it allows that debtor to propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is also used by a consumer debtor who does not qualify for Chapter 7 relief under the means test.
At a confirmation hearing, the court either approves (confirms) or disapproves the debtor’s proposed repayment plan, depending on whether the debtor meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike Chapter 7, the Chapter 13 debtor does not receive an immediate discharge of debts. The Chapter 13 debtor must complete the payments required under the plan before the discharge is received. The debtor is protected by the “automatic stay” from lawsuits, garnishments, and other creditor actions while the plan is in effect. The debtor is protected by the discharge injunction after the discharge order is entered. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.
Less common chapters include Chapter 9, Chapter 11, Chapter 12, and Chapter 15.
Chapter 9 is titled “Adjustment of Debts of a Municipality.” Chapter 9 provides for reorganization, much like a reorganization under Chapter 11. Only a “municipality” may file under Chapter 9, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.
Chapter 11 is titled “Reorganization.” Chapter 11 ordinarily is used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. However, an individual may also be eligible for Chapter 11 relief. The Chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The bankruptcy court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging other obligations. The debtor can also terminate burdensome contracts and leases, recover assets, and re-scale its operations in order to return to profitability. Under Chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
Chapter 12 is titled “Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income.” Chapter 12 provides debt relief to family farmers and fishermen with regular income. The process under Chapter 12 is remarkably similar to that of Chapter 13, under which a debtor proposes a plan to repay debts over a period of time – no more than three years unless the court approves a longer period, not exceeding five years. There is also a trustee in every Chapter 12 case whose duties are very similar to those of a Chapter 13 trustee. The Chapter 12 trustee’s disbursement of payments to creditors under a confirmed plan parallels the procedure under Chapter 13. Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
Chapter 15 is titled “Ancillary and Other Cross-Border Cases.” Chapter 15 provides an effective mechanism for dealing with cases of cross-border insolvency.