As a consumer or small business owner you file bankruptcy most likely under Chapter 7 or 13, or possibly 11. Chapter 12 for family farmers.
Chapter 7, or “straight bankruptcy,” is the most common type of bankruptcy. Nearly 2/3rds of all bankruptcy cases filed in 2015 were Chapter 7s
It’s what most people think of when they hear “consumer bankruptcy.”
Chapter 7 often provides the quickest way to a financial fresh start. But it isn’t the best type of bankruptcy for everyone.
A Chapter 7 case legally eliminates (“discharges”) many but not always all debts. Bankruptcy never discharges certain kinds of debts, such as child or spousal support obligations owed to an ex-spouse under a divorce decree or settlement. You can discharge other debts, such as income taxes, if they meet certain conditions. Student loans are very rarely dischargeable.
On secured debts, you usually have the option of keeping or surrendering the collateral. To keep the collateral generally you have to pay all or most of such debts. But there are exceptions.
A Chapter 7 case lasts about 3 to 4 months from filing to the completion. The bankruptcy court appoints a trustee to review your assets and other aspects of your financial affairs.
Although Chapter 7 is theoretically a “liquidation” form of bankruptcy, there’s a good chance you can retain everything you own. That’s because you can “exempt” everything which fits within certain categories up to specific maximum dollar amounts. Otherwise the trustee can take and sell whatever is not covered by the “exemptions.”
Once you discharge your debts, those creditors can never again legally try to collect those debts from you.
Chapter 9 is the “Adjustment of Debts of a Municipality,” so we’re only including it to be thorough.
It’s for certain governmental entities. “Municipality” “means political subdivision or public agency or instrumentality of a State.” (Section 101(40)). States themselves can’t file bankruptcy or reorganize their debts. Only their political subdivisions can do so, such as cities, counties, school districts and other public entities within the states.
These are extremely rare–only four “municipalities” filed Chapter 9 cases throughout the entire country in 2015.
Chapter 11 is the “Reorganization” chapter of the Bankruptcy Code. Through it, a business or individual can restructure its finances through a plan of reorganization approved by the bankruptcy court. The plan usually reduces the debts of the business or individual, and changes debt payment terms.
The purpose of Chapter 11 is to help the business or individual–
- balance its income and expenses
- return to profitability
- continue in operation in a sustainable way
Under Chapter 11, a business can often sell some or all of its assets so it can focus on more profitable parts of its operation or as a way to raise funds to pay down or escape some of its debts.
Individuals would consider Chapter 11 mostly for one of two reasons. First, they own and operate a relatively significant business that they want to continue in operation. Second, their debts exceed the maximum limits allowed under Chapter 13.
Much fewer Chapter 11s are filed than Chapter 7s and 13s. In 2015 around 7,200 were filed, less than 1% of the 844,000 total bankruptcies.
Chapter 12 is the “Adjustment of Debts of a Family Farmer or Fisherman.”
It’s essentially a combination of Chapter 11 and 13, specifically for relatively modest farming operations and commercial fishing operations. Another very rare type of bankruptcy, with only about 400 filed throughout the U.S. in 2015.
Chapter 13 is the “adjustment of debts of an individual with regular income.”
It’s the second most common type of bankruptcy after Chapter 7. More than 300,000 Chapter 13 cases were filed in 2015, about 35% of all the cases filed.
Under Chapter 13 you and your Louisville bankruptcy lawyer propose a debt repayment plan based on your ability to pay. That plan usually does not pay back all your debts. It often pays very little or even nothing to some of your creditors.
You must have a steady source of income to be eligible. Any regular source is fine–wages, self-employment income, unemployment income, or social security income.
Your payment plan almost always covers a period of three to five years. That is your “applicable commitment period.”
Your lawyer structures this plan around a detailed set of laws about how you can treat each kind of debt. Your creditors, and the Chapter 13 trustee who administers your case, can object to the proposed plan. Usually the parties negotiate and resolve these objections, or if necessary the bankruptcy judge rules on them. Often there are no objections or they are minor. The bankruptcy judge signs off on the plan, either as originally proposed or as adjusted to meet any objections. Then that plan governs the rest of your case.
Over time you successfully pay off your Chapter 13 plan. After you’re done the bankruptcy court forever discharges all or most of your remaining debts.