Types of Bankruptcy

Different Types of Bankruptcy

Different Types
of Bankruptcy

One very important thing to understand whether you’re a home owner or business owner, is the different types of bankruptcy that you can file under the Title 11 of the United States Bankruptcy Code. The terms might sound like legalese at first but you need to know the language if you want to take advantage of the power of these laws.

There are six primary chapters of bankruptcy proceedings that have provisions under the United States Bankruptcy Code but we need only mention three of these: Chapter 7, Chapter 11 and Chapter 13.

Chapter 7 Bankruptcy, Entitled Liquidation

This bankruptcy procedure considers systematic, court-supervised proceedings where a trustee gains control over the property of the debtor, and by order of the court, sold in exchange for cash. The proceeds will then be distributed by the trustee to the creditors. There will be properties that can and will be retained by the debtor with a mind to the rights of secured individuals if any. There are situations where there are minimal to no assets, which automatically means that no liquidation of a bankrupt individual’s properties and assets can occur and this case will be tagged as a ‘no-asset case’. A creditor who needs to collect unsecured payment may get the money owed from the debtor’s estate provided that the procedure is an asset case and there is substantiation of claim that can be presented to the court. If the entity that filed for bankruptcy is a person and not a collective business organization, discharge may be granted that releases the said individual from liabilities for certain dischargeable money owed to certain creditors.

Changes made to Chapter 7 of the Bankruptcy Code put into place Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This serves as a gauge to check the eligibility of an individual debtor for relief or discharge from debts under Chapter 7.

Chapter 11 Bankruptcy, Entitled Reorganization

This type of case is utilized by business enterprises that want to maintain a continued status of business operation and concurrently pay back creditors through an approved program of reorganization mandated by the court. A debtor under this bankruptcy case usually maintains the right to create a plan of reorganization for the initial 120 days after the case has been filed. All the facts and details pertaining to the planned reorganization of the business will be disclosed to the creditors for evaluation, however, all powers of approval or disapproval remains with the court. The said reorganization may end unnecessary contracts and services that over taxes the said business. Resizing of commercial activity to minimize costs is also a usual option and a general consolidation of all business functions is aimed at creating profit and decreasing debt.

Chapter 13 Bankruptcy, Entitled Adjustment of Debts of an Individual With Regular Income

This bankruptcy scheme is for the individual debtor who has a steady means of income and it allows the debtor to hold important assets such as a house or a car. Similar to Chapter 12, the debtor can propose a plan for repayment to the creditors concerned with similar time constraints. Chapter 13 is said to be more preferable than Chapter 7 since the debtor maintains possession of the assets of his estate and as with chapter 12, a court-appointed trustee ensures that payments to creditors is maintained. A Chapter 13 debtor has to first complete the required payments before discharge is received from the court. While the plan is active, the debtor is immune from lawsuits, garnishments and other similar motions that involve collection of the said debt.


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