Learning to Differentiate Between The Various Chapters Of Bankruptcy
In the United States, there are six ways an individual or company can file for Bankruptcy. These are known as Chapters, and are referred to by a number as specified in Title 11 of the Code of Laws of the United States. It can be difficult for anyone going through the stress of bankruptcy to learn the differences between these chapters, but given the importance of doing so, we’ve put together a basic guide to the critical differences between each chapter.
Chapter 7: Liquidation
Primarily used by private individuals, liquidation is essentially scrapping one’s assets and starting over with a clean financial slate. It is both the simplest and most costly form of bankruptcy for most cases. The bankrupt individual must sell his or her possessions, with the exceptions of a single residence and limited personal items, in order to pay as much of his or her debts as possible. Once this is done, the rest of the individual’s debts are forgiven, and they are permitted to begin anew.
Chapter 9: Municipal
Municipal Bankruptcy is a way for federal municipalities, such as cities, bureaus, and other governmental entities, to void their debts. Uniquely, it allows for collective bargaining agreements to be rewritten. The city of Detroit, Michigan, is a recent example of a high profile Chapter 9 bankruptcy.
Chapter 11: Reorganization, or Corporate Bankruptcy
Used by both business debtors and those of significant personal wealth, filling Chapter 11 allows the debtor and his or her trustees to develop a repayment plan during which their business or estate can still operate. While there is no limit to the amount of forgivable debt, the cost of such a filing renders it impractical for most individuals and small businesses. No items are required to be liquidated.
Chapter 12: Farmer’s Rehabilitation
Chapter 12 bankruptcy is virtually identical to that of Chapter 13, save that it is intended for family farmers and fishermen. Differences are miniscule, and this filing is rarely used today.
Chapter 13: General Rehabilitation
Any private individual with a sustainable income can file for a General Rehabilitation Bankruptcy. The individual must develop a payment plan to meet a percentage (typically 30-50%) of his debts, or else face liquidation as described in Chapter 7. While generally preferable to filing Chapter 7 for individuals who believe they will be able to pay their debts, filing Chapter 13 has a very negative effect on the debtor’s credit rating.
Chapter 15: International Cases
Undoubtedly the most complicated type of filing, Chapter 15 bankruptcies apply in cases where international entities default on debts to the United States or its citizens. It primarily exists to disincentivize debtors from fleeing to other nations through broad powers of collection and harsh penalties.
This only a very basic rundown of the intricacies to U.S. Bankruptcy code. As it is based on a document that has been continuously amended since the 18th century, difficulties arising from particular situations are the norm. Always speak with a lawyer, preferably a bankruptcy expert, before filing for bankruptcy, and keep in mind the effects all types of bankruptcy have on their filer’s credit ratings and assets.
Information provided by McLay, a business bankruptcy law firm in Ontario.
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Category: Bankruptcy
