*****Disclaimer: This is not legal advice and is for educational purposes only. This does not create an attorney-client privilege.
After learning a bit more about what bankruptcies are and what the benefits and repercussions for filing for one can be from our recent blog post, you might be a bit curious about the specific types and what might potentially be suitable for you. Generally speaking, a bankruptcy refers to you formally declaring that you are unable to pay off your debts. Well, bankruptcies are outlined in the U.S. Bankruptcy Code and there are 6 more specific classifications for them, though Chapter 7 and Chapter 13 are the most commonly filed for. The “chapter” refers to the section of the U.S. Bankruptcy Code from which they come from. This blog will outline these various types.
Chapter 7 Bankruptcy- Liquidation
Liquidation, also known as a straight bankruptcy, is the most common kind of bankruptcy for individuals to file for. Individuals who are unable to pay their debts have their assets assessed and liquified for their value, which is overseen by an appointed trustee. Liquidation essentially means your physical property is sold, and the money they generate is used toward repaying your creditors. After your assets are liquidated, it is typical for any unsecured debt left over to be erased. This would include credit card and medical care debt, but not debt from student loans or taxes.
What you are required to liquidate during this process varies somewhat from state to state. For example, in many states, you are not required to sell basic necessities, such as your home, car or the balance of your retirement accounts. However, most Chapter 7 bankruptcies are no-asset proceedings, meaning the property value is not enough to sell.
This kind of bankruptcy cannot prevent foreclosure, only postpone it. You would need to reaffirm the debt if you wanted to keep any of your property that you owe money on. For you to qualify for a Chapter 7 bankruptcy, the court must first determine that you don't have the means to pay your debts and you will need to attend a meeting of creditors to be questioned about your disposable income and assets. This type of bankruptcy will remain on your record for ten years.
Chapter 9 Bankruptcy- Municipalities
These kinds of bankruptcies are for municipalities; a municipality is local region with its own government or corporate status. Thus Chapter 9 proceedings apply to institutions such as school districts, towns and cities, etc. that need to organize and pay back their outstanding debts.
This kind of bankruptcy is very rare; it has only been used roughly 560 times since the code was created. One notable and fairly recent example of its use was when the City of Detroit, Michigan filed for and was approved for it in 2014. Their “Plan of Adjustment” eliminated $7 billion worth of debt and deferred the repayment of unsecured debts for a decade. It is remarkable that this plan and filing was accepted by “almost all classes of creditors” and was successfully judicially approved.
Chapter 11 Bankruptcy- Large Reorganization
This next class of bankruptcy is for “large reorganization”; in the majority of cases, this kind of process is used for a corporation/business. With this type, the business creates a plan of operation that outlines how they will continue to run the business with a structured plan for debt repayment included. This type of plan is designed by the debtor company, but must be approved by not only the courts, but the creditors as well. In other cases this type of bankruptcy might be chosen by individuals with too much debt to qualify for the Chapter 13 proceedings, but also have a lot of high value assets. For example, real estate agents, celebrities or other affluent individuals might commonly use this type. For the average person however, this is not likely to be what you would file under.
Chapter 12 Bankruptcy- Family Farmers
This type of bankruptcy is designed primarily for family farmers, as well as for fishermen. It allows for them to avoid selling all of their property and postpone/avoid foreclosing on their property. It is also similar to a chapter 13 case, but there are more flexible options and higher limits for debts with Chapter 12 filings.
Chapter 13 Bankruptcy- Repayment Plan
This is the other most common type of bankruptcy, along with Chapter 7 filings, which were described above. In this type, your debt is more so reorganized than it is forgiven (as it is in Chapter 11 cases). The court designs a repayment plan with amounts due monthly, so that you can reduce all of your secured debt, and a portion of your unsecured debts, over a period of time of usually 3-5 years. How much you are required to pay monthly is determined by your income, as well as the principal on your debt. Notably, this amount is based less so on additional expenses. The court can check your spending and place you on a budget to ensure you are able to make these monthly payments.
The advantage of this kind of plan is that it allows you to hang onto your assets, instead of forcing you to liquidate them as with a Chapter 7 bankruptcy. It can be used to postpone foreclosure since it allows you time to catch up on your mortgage. To file for this kind, you must be up to date on your tax filings, your secured debt must amount to less than $1,257,850 and your unsecured debt is less than $419,275.
Chapter 15 Bankruptcy- Used in Foreign Cases
The final classification of bankruptcies are Chapter 15 cases. These cases are used specifically for circumstances involving international exchanges. It gives foreign creditors access to the U.S. bankruptcy courts and allows for international bankruptcy and insolvency issues and disputes to be resolved.