Bankruptcy Types
What is Bankruptcy?
Bankruptcy is a legal proceeding where a person who is unable to pay their bills can eliminate some or all of their debt through a court order called a discharge. Federal law provides the right to file for bankruptcy, which is handled in a federal court. Filing immediately stops all of your creditors from seeking debt collection until the court rules on your case.
Since 2005, filing for bankruptcy has become more complicated for individuals and each district court has their own filing rules, but hiring an experienced Bay Area attorney will improve your chances for filing accurately. Check out our section for considerations on filing for bankruptcy without an attorney.
What are the different types of bankruptcies?
The vast majority of cases are filed under the three main chapters of the Bankruptcy Code, which are Chapter 7, Chapter 11, and Chapter 13. All provide for some possible payments to your creditors, supervision by a trustee, and possible discharge of your debts.
Chapter 7: the straight or liquidation bankruptcy
To file for bankruptcy under this chapter, the debtor might be an individual, a partnership, or a corporation or other business entity.
For Individuals:
A personal Chapter 7 is designed for filers who have few assets they want to keep, while the valuable assets may be liquidated and used to pay off the debt, thereby discharging the debtor’s obligation to pay. Some of the assets that may be protected from liquidation, referred to as Exemptions, may include a car, clothing, or retirement accounts among others and vary from state to state. Due to exemptions, most people don’t have to give up any of their possessions. Once the trustee grants a discharge, the debtor no longer has any obligation to pay the remaining debts, unlike a Chapter 13 where the debtor enters into a repayment plan to keep most or all of their property. However, some debts are not dischargeable like child support, alimony, student loans, among others.
For Businesses:
A business Chapter 7 is designed for businesses that are unable to service its debts or pay its creditors. The business must cease operations, while the trustee sells all of the assets and then distributes the proceeds to the creditors. Any residual amount is returned to the debtor or business owner. If the business operations are continued during liquidation, then a trustee is appointed immediately. Employees may or may not lose their jobs. Once all of the assets have been distributed, the bankruptcy concludes in a dissolution, not a discharge, as is the case for a personal Chapter 7.
Chapter 11: the corporate reorganization bankruptcy
To file for bankruptcy under this chapter, the debtor might be an individual, a corporation, sole proprietorship, or partnership.
A Chapter 11 is typically used for corporations since they don’t qualify for Chapter 13. However, individuals and sole proprietorships may file under this chapter as well. And, may need to file under Chapter 11 if their debts are above the Chapter 13 limitation on debts. Unlike Chapter 7 where the trustee takes over the business operations, in Chapter 11 the debtor might retain control of the business entity as the debtor in possession. Also, like Chapter 13, the business is not dissolved at the conclusion of the bankruptcy case since this chapter allows for the restructuring of the debts. If the debts exceed the assets, the restructuring might result in the creditors being left with ownership of the newly reorganized business and the debtor is left with nothing. Creditors may vote on the proposed restructuring plan paid by the debtor or the creditors are able to propose a plan of their own design. If the plan is not confirmed by the bankruptcy court, the trustee can convert the filing to a Chapter 7 liquidation thereby dissolving the business.
Chapter 13: the reorganization bankruptcy or wage earner’s plan
To file for bankruptcy under this chapter, the debtor might be an individual, sole proprietorship, or unincorporated business entity if the debts are below the limits set by Title 11 of the United States Code. Secured debts must be less than $1,010,650 and unsecured debts must be below $336,900, otherwise filed under Chapter 11.
For Individuals:
A personal Chapter 13 is available to filers with regular income who develop a plan to repay some or all of their debt. These filers will have many valuable assets they want to keep including a home or car, and the debts are restructured into a payment plan over 3-5 years. At the conclusion of the repayment plan, the remaining balance is discharged and the debtor has no further obligation to pay. The advantage to Chapter 13, as opposed to a straight liquidation, is to stop foreclosure proceedings on your home or to reduce your monthly payments on your debts by consolidating into one monthly payment. Additionally, the debtor only pays back a percentage of the debts. Other advantages might include lowered interest rates, cramming down a home mortgage or auto loan (the total amount owed is lowered to the actual value), and the second mortgage stripped off the house.
For Businesses:
A business Chapter 13 is available to self-employed business, not corporations, who might still have value and do not wish to have their businesses dissolved. Debts are restructured over a 3 to 5 year repayment plan and include an automatic stay prohibiting creditors from collecting during that time. The debtor maintains the business operations during the bankruptcy and repayment period, not the trustee.
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