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Making Sense of the Various Types of Bankruptcy

By: Frederick L. Bunol

 You may have heard references to different types of bankruptcy, such as “Chapter 7” or “Chapter 13”, and wonder what those terms mean.  Below is a short summary of the various bankruptcy chapters.

The Bankruptcy Code can be found at Title 11 of the United States Code.   The Bankruptcy Code is made up of nine chapters, which are Chapters 1, 3, 5, 7, 9, 11, 12, 13, and 15.  When a bankruptcy is filed, it is filed under either Chapter 7, 9, 11, 12, 13, or 15 of the Bankruptcy Code.  The most common chapters used by individuals to file bankruptcy are Chapters 7 and 13.  Most entities file bankruptcy under Chapter 7 or Chapter 11.  The person or entity that files bankruptcy is commonly referred to as the “debtor.” The various chapters are used by the debtor to achieve different goals and objectives.  A brief description of each of the common types of bankruptcy are as follows.

 

Bankruptcy filed under Chapter 7 of the Bankruptcy Code

 The goal of the individual Chapter 7 debtor is to obtain an order discharging all of his/her debts and to protect the debtor’s future income from seizure. A discharge means that the debt is considered satisfied and the debtor no longer has to pay the debt. This gives the debtor the opportunity for a fresh start without the burden of prior financial misfortunes.   In exchange for the discharge, the Chapter 7 debtor gives up all of the debtor’s non-exempt assets that have equity.  Chapter 7 is also commonly referred to as a “Liquidation” because a Chapter 7 Trustee will be appointed to sell the debtor’s non-exempt assets and distribute the sale proceeds to the creditors.  Although the Chapter 7 Trustee has the authority to sell the debtor’s non-exempt assets, the vast majority of Chapter 7 cases are “no asset” cases and no assets are actually sold.

 

Bankruptcy filed under Chapter 13 of the Bankruptcy Code

The goal of the Chapter 13 debtor is to keep his/her assets and pay a reasonable amount to creditors over a three to five year period of time.  At the end of the plan, the debtor will obtain an order discharging the unpaid debt.  A Chapter 13 Trustee is appointed in each case to collect the monthly payments under the plan and distribute the funds to the creditors in accordance with the plan.

 

Bankruptcy filed under Chapter 11 of the Bankruptcy Code

The goal of the Chapter 11 debtor is to restructure debt and reorganize the debtor’s operations so that it can once again be profitable and pay creditors over a period of time.  Individuals who are not eligible to file Chapter 7 or Chapter 13, may also choose to file under Chapter 11.

 

Bankruptcy filed under Subchapter V of Chapter 11 of the Bankruptcy Code

 The goal of an entity that files under Subchapter V (subchapter 5) is to more quickly reorganize its debt at a lower cost than is usual under ordinary Chapter 11.  The subchapter 5 was created to give small businesses and individuals a more streamlined less expensive option to reorganize.

There are many more details that need to be considered when filing bankruptcy and you should always consult with an experienced bankruptcy attorney prior to filing bankruptcy.  The above is only intended to give readers a general overview of the various types of bankruptcy that are available.

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