The Chapters of Bankruptcy

When you read or watch the news, chances are you will learn about a company or person filing for bankruptcy. However, the headline will sometimes not use the word “bankruptcy” and will instead say “they have filed Chapter 13.” It is obvious that the company tanked, but many do not know the specifics of what Chapter 13 is. In fact, they may not understand what the other chapters suggest either.

This article will dive into what the different chapters of bankruptcy are and what they Entail.

Defining bankruptcy

Bankruptcy is a formal legal proceeding pertaining to an individual or business being unable to repay their outstanding debts. The bankruptcy process will typically start with a petition that the debtor files or on behalf of creditors. The former is more common than the latter. The debtor’s assets undergo measurement and evaluation, and sometimes the assets help repay part of the outstanding debt.

Bankruptcy offers a chance for a person or business to start over by forgiving debts that they cannot pay. At the same time, it allows creditors to obtain a measure of repayment. Specifically, repayment that draws from the assets of the individual or business that are available for liquidation. Theoretically speaking, being able to file for bankruptcy is advantageous for the economy. It allows people and companies a second chance to acquire access to credit and provide creditors with some debt repayment. Once completing bankruptcy proceedings, the debtor is free from debt obligations that were incurred before filing for bankruptcy.

The bottom line is bankruptcy is a major life event whose effects can extend beyond your finances. It could follow you wherever you go. Whether you are applying for a job, creating a business, or buying a house, it could still have a presence in your life. People interpret it as a fresh start, but the truth of the matter is bankruptcy does not treat the problem. In actuality, it only deals with the symptoms of the overall problem.

Different types

When you hear in the news that someone or a company is filing, say, Chapter 11, you may think to yourself “What are the previous 10 chapters?” The answer is there aren’t any. That is to say, technically, there aren’t 10. Contrary to what chapter numbers imply, there is no Chapter 1, 2, 3, or anything going in sequential order. At least, not when it comes to the main chapters we will go over below.

Generally speaking, the goal of bankruptcy is to remove any debt. Be that as it may, not all bankruptcies are equal. There are six different types:

• 7
• 13
• 11
• 12
• 15
• 9

Chapter 7

Individuals typically file Chapter 7 bankruptcy more so than companies do. However, there are some companies that will file Chapter 7. That being said, they are normally the ones with few or no assets. This type of bankruptcy permits the disposal of unsecured debts, including credit card balances and medical bills. Those with nonexempt assets must liquidate the property to repay some or all of their unsecured debts. Examples of these assets include the following:

• Family heirlooms (i.e. collections with high valuations, such as stamp or coin collections)
• Cash, stocks, or bonds
• Second homes
• Someone who is filing Chapter 7 bankruptcy is essentially selling off their assets in order to clear their debt. People without valuable assets and only exempt property may not repay part of their unsecured debt. Some things they may sell are clothing, household goods, tools for their trades, and a vehicle worth a certain value.

Chapter 13

Chapter 13 is the second most common type of bankruptcy that individuals file. While Chapter 7 bankruptcy will forgive your debt, Chapter 13 bankruptcy will completely reorganize it. The court will approve a monthly payment plan, which allows you to repay a portion of your unsecured debt. Moreover, it lets you pay back all of your secured debt during a three to five-year period. The amount of the monthly payments largely depend on your income and the total amount of debt. However, the court will also put you on a strict budget and monitor your spending.

This brand of bankruptcy, unlike Chapter 7, allows you to retain your assets and catch up on debt that is not nondischargeable. Chapter 13 is also useful in stopping foreclosure by granting more time to update your mortgage.

Chapter 11

The main goal of businesses who file Chapter 11 bankruptcy is to reorganize and remain in business. Moreover, become profitable once more. Filing Chapter 11 permits a company to construct plans for profitability, figure out how to increase revenue, and cut costs. Preferable stockholders, should there be any, could still receive payments, but common stockholders won’t.

Let’s look at a housekeeping business filing Chapter 11 as an example. Doing so may boost its rates only slightly and provide additional services to become profitable. With Chapter 11 bankruptcy, the business can continue executing its activities without interruption. At the same time, they can work on a debt repayment plan while the court supervises. There are rare cases where individuals can also file Chapter 11.

Chapter 12

Out of all the chapters of bankruptcy, Chapter 12 is the newest law of the bunch. This is a plan of repayment that permits family farmers and fishermen to bypass selling all their stuff. Similarly, it allows them to avoid foreclosing on their property. It lets them revamp their finances and completely avoid foreclosure or liquidation. In this sense, it shares some similarities with Chapter 13. However, where it differs is it provides additional advantages to debtors. These benefits include being more flexible and having noticeably higher limits of debt.

Chapter 15

Chapter 15 handles international bankruptcy issues and grants access to U.S. bankruptcy court for foreign debtors. This chapter also allows foreign nationals to file for bankruptcy in the U.S. bankruptcy courts. Specifically, if they have property, assets, or they conduct business in multiple countries, including the U.S.

There are five primary objectives for Chapter 15:

1. Total cooperation between courts and parties of interest in the U.S. with the courts and parties of interest. Similarly, collaboration with authorities of foreign countries participating in cases of international insolvency.

2. Providing protection and maximizing the debtor’s asset value.

3. Fair and efficient administration of cross-border insolvencies. At the same time, offering protection for the interests of the creditors and parties of interest, including the debtor.

4. An increase in legal certainty regarding both trade and investment.

5. Aiding in the rescue of businesses in financial trouble in order to protect investments and sustain employment.

Chapter 9

Chapter 9 bankruptcy lets counties, municipalities (i.e. cities, towns, and villages), taxing districts, school districts, and municipal utilities to reorganize their financial obligations. It is essentially another repayment process that allows towns, cities, school districts, and others to restructure and repay their debt. It is important to note that it is almost impossible for creditors to force liquidation upon a municipality’s assets. Chapter 9 is different from other bankruptcy chapters in one key way. That being there is no provision in the law for asset liquidation of the municipality and proceed distribution to creditors.

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Here are a couple books if you want to further your reading on Bankruptcy:

1. Personal Bankruptcy Laws For Dummies - See on Amazon here: https://amzn.to/4gtoJYc
2. United States Bankruptcy Code; 2024 Edition - See it on Amazon here: https://amzn.to/3VyGk90