Know about the Common Types of Bankruptcy

The main goal of bankruptcy laws is to give a debtor a fresh start from the burden of debts. This goal is achieved through bankruptcy discharge which releases debtor from liability of debts & prohibits creditors from taking any kind of action for recovery of those debts.

Title 11 of the United States Code is the Bankruptcy Code. It is the uniform federal law governing all bankruptcy cases in United States. There are bankruptcy courts for each of the judicial districts in the country. And in total there are 90 bankruptcy districts in the country.

There are 6 types of bankruptcy cases as described under the Bankruptcy Code which are given the names of the chapters that describe them. These are Chapter 7, 13, 11, 12, 9 and 15.

A brief introduction to these six types of bankruptcy cases will be useful for people thinking about filing bankruptcy.

Chapter 7 Bankruptcy which is entitled Liquidation, is a process in which a trustee takes over all the assets of debtor’s estate subject to his rights to retain certain exempt property & rights of secured creditors over the assets. The trustee is responsible to sell the assets and distribute the proceeds to creditors. After filing petition a debtor normally receives a discharge within a few months from personal liability for certain dischargeable debts. But before a debtor can file for chapter 7 bankruptcy he has to go through what is called as “Means Test” which is used to determine whether he can qualify to file chapter 7. If it is found that his income exceeds specified limits then he may not be eligible for chapter 7 relief.

Chapter 13 Bankruptcy is entitled Adjustment of Debts of an Individual With Regular Income. Debtors with regular source of income can select this type of bankruptcy. In addition those who are not able to qualify for Chapter 7 under the means test also file under this chapter. Chapter 13 bankruptcy allows a debtor to propose a repayment plan to his creditors over a period of time which is usually 3 to 5 years. Chapter 13 bankruptcy is quite different from Chapter 7 as in this form of bankruptcy the debtor remains in possession of property & through trustee of the plan makes payments to creditors as per his anticipated income over the life of the term of the plan. The debtor is required to complete all the payments under the set repayment plan before receiving a discharge.

Chapter 11 Bankruptcy is entitled Reorganization and is used by commercial enterprises. Those enterprises which want to continue their business & also repay their creditors using a court approved reorganization plan select this type of bankruptcy. Debtors under this plan have rights to file a plan of reorganization for the first 120 days after the case filing. But they are required to provide creditors adequate information so that the plan can be evaluated properly by way of a disclosure statement. Under this plan the debtor can reduce debts by discharging a portion of his obligations & repaying others. In Chapter 11 Bankruptcy debtor undergoes a period of consolidation & emerges with a reorganized business & reduced debt burden.

Chapter 12 which is Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income is meant to provide debt relief to fishermen & family farmers having regular income. This plan is similar to Chapter 13 Bankruptcy with a repayment period of 3 years unless an extension is allowed by court up to a maximum of 5 years. The disbursement of payments to creditors under this plan are similar to the procedure used in Chapter 13 plan & allows a family fisherman or farmer to continue his business while the bankruptcy plan continues.

Chapter 9, is referred to as Adjustment of Debts of a Municipality. Only a municipality which includes counties, school districts, cities & towns and tax districts, can file under Chapter 9. This plan essentially provides for reorganization quite like reorganization under Chapter 11 bankruptcy.

Chapter 15, which is Ancillary & Other Cross-Border Cases, provides for a mechanism to deal with cross border insolvency cases. It is used when a debtor’s property is subject to U.S. laws as well as laws of one or more countries.

Many people believe that bankruptcy is helpful in making a person debt free within a short span of time. But one thing they should know is that bankruptcy has negative affect on a person’s credit profile and can result in him being not able to qualify for loans with competitive rates for a number of years. Bankruptcy should not be taken as the only way out of debt problems and should be considered after all other plans to come out of debt burden fail.

Some Resources:

Filing Bankruptcy in North Carolina

Waterbury bankruptcy attorney – Facing bankruptcy? Need legal advice? This information on bankruptcy attorneys may help you.