Different Chapters of Bankruptcy

The Different Chapters of Bankruptcy

Bankruptcy is a legal process that functions as an appeal to the court for debt relief. Individuals, families, and business entities can all file for bankruptcy to help get debts discharged or create a payment plan. The debtor who wishes to access assistance can voluntarily file a bankruptcy petition. However, qualified creditors may also file bankruptcy if the circumstances seem dire. Claiming bankruptcy places an automatic "stay" on all current debts, prohibiting creditors from taking collection actions and enacting foreclosures and lawsuits. The U.S. Bankruptcy Court handles all bankruptcy cases, with 94 locations throughout the country. The courts use Title 11 of the United States Code, also known as the Federal Bankruptcy Code, to guide the process of every case. Title 11 comprises nine chapters. Three of the chapters outline general court rules and conduct, and six chapters outline the types, or chapters, of bankruptcy that an entity can claim. The six kinds of bankruptcy are Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Each chapter has specific eligibility requirements and brings different consequences.

Low-income parties with lots of debt but mostly low-value assets may decide to claim Chapter 7 bankruptcy. Chapter 7 bankruptcy allows individuals, families, or businesses to liquidate assets to pay back creditors. Liquidation of assets means that the court sells the debtor's property to make enough money to cover the debt. Any debt that the liquidation process does not cover typically gets a discharge, meaning the court erases the debtor from liability. However, if a party is in debt over alimony, child support, and student loans, these debts are exempt from discharge. Chapter 11 bankruptcy, available to businesses and individuals, is known as "reorganization" bankruptcy, as it involves organizing and consolidating debt payments through the bankruptcy courts. This chapter typically takes three to five years to complete. Chapter 12 bankruptcy is specifically designed to provide relief to family farmers and fishermen who are experiencing debt. Under Chapter 12, much like Chapter 11, debtors can create repayment plans that last from three to five years. Experts typically recommend that parties file for bankruptcy with an attorney, but parties can efficiently file pro se bankruptcy. For a successful bankruptcy filing, it is crucial to know the functions of the six chapters.

Bankruptcy records are maintained and disseminated by the court, where the respective cases are filed and heard. Like other U.S. court records, bankruptcy record information is available to interested and eligible members of the public unless restricted or sealed by a court order.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is also called liquidation bankruptcy and is the most common type of bankruptcy claimed. In 2020, there were 381,217 Chapter 7 bankruptcy filings out of a total number of 544,463, meaning that Chapter 7 cases make up an estimated 70% of bankruptcy filings. 2020 saw the lowest number of Chapter 7 bankruptcy filings since 2006. The process involves the liquidation of assets to provide a way to pay creditors. However, there are eligibility requirements that each party must meet. To qualify to file for relief under chapter 7 of the Bankruptcy Code, the debtor must be an individual, couple, or business entity. Debtors who wish to file bankruptcy must first submit proof of income for the previous six months. If the debtor's average income is below the state median, they can pursue Chapter 7 bankruptcy. If the income is higher than the state median, parties must take a "means test" to determine if they can still qualify. Individuals, families, or businesses with low income often file for Chapter 7 because the chapter relies on asset liquidation and discharges of debts.

The first step in a Chapter 7 bankruptcy case is filing the petition at the district bankruptcy court. Chapter 7 bankruptcy filings typically bring a charge of $245.00. There is also a $75.00 administrative fee and a $15 trustee surcharge. Filing parties can pay fees in installments or with the court clerk upon filing. There are, however, exceptions. If a party's income is less than 150% of the state median income, the court may waive the fees. Many individual debtors must also complete a credit counseling course before they are eligible to file. Along with the petition and fees, parties must include:

Value of assets and liabilities;
Proof of income including source, amount, and frequency;
All past and current expenditures;
A detailed list of living expenses, including home payments, clothes, medical bills, utilities, taxes, and transportation;
A complete list of creditors and amounts owed;
Proof of completion of credit counseling (if applicable)

After receiving the petition, the court places a stay on all debt collections by sending out a notice to all creditors stating that the court has initiated a bankruptcy case. The court also assigns a case trustee to take responsibility for the case. The case trustee's role in a chapter 7 bankruptcy case is to act as an impartial party to take action on behalf of the debtor, the court, and creditors. No more than 40 days after filing, the case trustee must schedule a meeting of creditors. While the debtor is required to attend, creditors have the option to skip it. In the meeting of creditors, the trustee and willing creditors ask the debtor questions under oath to establish their financial situation. The purpose of the meeting is to make sure that Chapter 7 bankruptcy is a good fit for the debtor and creates a tentative liquidation and discharge plan. A discharge of debt is essentially a dismissal of the debtor's responsibility to pay. Discharges make debtors no longer liable for unpaid debts, and creditors cannot attempt to collect them any longer.

What is Chapter 9 Bankruptcy?

Chapter 9 of the bankruptcy code outlines the process of a Municipality Bankruptcy. Chapter 9, or municipality, bankruptcy applies to cities, towns, tax districts, school districts, and villages. Municipalities in financial distress who need to create a plan and reorganize debt to pay back creditors can claim this bankruptcy chapter. Chapter 9 bankruptcy does not involve the liquidation of assets per the Tenth Amendment and only allows the bankruptcy court limited jurisdiction in the case. The bankruptcy court's responsibilities in chapter 9 bankruptcy cases are to approve the petition, verify a payment plan, and ensure that the indebted party follows through with the plan.

U.S. Bankruptcy Code defines a municipality as a "political subdivision or public agency or instrumentality of a State." In other words, it can apply to cities and towns and public improvement districts, school districts, bridge authorities, highway authorities, and gas authorities. The eligibility requirement for municipalities who wish to claim bankruptcy are as follows:

There must be specific authorization by state law or another kind of legal authority for the municipality to be considered a debtor;
The municipality must be legally insolvent;
The municipality must be committed to making a plan to solve the debt;
The municipality must take one of the following actions:
Obtain a creditors' agreement;
Negotiate with creditors and fail to reach an agreement;
State their inability to negotiate with creditors due to impracticality.

Chapter 9 bankruptcy can only happen voluntarily and with a petition including a full, detailed list of creditors. Due to the importance of objectivity and nonpartisanship, bankruptcy judges are not automatically assigned to a chapter 9 case once filed. Instead, it is up to the chief judge in the court of appeals to designate the case's bankruptcy judge. Once a petition is filed, the bankruptcy rules require that the court notifies all involved parties and publishes the commencement of the case in a local, circulated newspaper once a week for three weeks. During this time, creditors have the chance to object to the bankruptcy petition. The court will then hold a hearing to determine the validity of the objection and either decide to dismiss the petition or move forward with the case.

The court applies an automatic stay once a party initiates a chapter 9 bankruptcy case. The stay prevents creditors from bringing legal actions onto the municipality to enforce payment. Essentially, the goal of a debtor in chapter 9 bankruptcy is to pay back debt and receive some discharges. A bankruptcy court can implement a discharge only after:

The court confirms the payment plan;
The municipality makes a deposit;
The court determines that the security deposit is valid.

Debts that are exempt or come from creditors with no knowledge of the bankruptcy case must still be paid in full by the municipality.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is available for individuals, businesses, corporations, and partnerships to claim. The chapter typically provides for reorganization; the debtor proposes a payment plan to avoid losing their business. Reorganization under this chapter is less common than most types of bankruptcy. In 2020, there were 8,113 Chapter 11 filings out of 544,463, meaning that chapter 11 bankruptcy claims made up only 1% of all bankruptcy filings. The first step in initiating a bankruptcy case is the filing of a petition. Filing can be done voluntarily by the debtor or involuntarily by eligible creditors. Debtors or creditors should file the bankruptcy petition in the district where the debtor has a residence. The petition usually includes:

Debtor's name or names
Social security number or tax identification number
Address of residence
Location of assets
Payment plan proposal
Explicit request for relief

Along with the petition, filing parties should include a list of liabilities and assets, an outline of current income and spending, contracts, leases, agreements, and a complete financial statement. The fee for filing a chapter 11 bankruptcy is $1,167 with a $550 administrative charge, and it is due no more than 120 days after filing. Once the petition is filed, the debtor is referred to as a "debtor in possession" because the debtor remains in possession of assets while enacting reorganization and paying back debts. In Chapter 11 bankruptcy, the debtor often performs many functions of a court-appointed trustee. The court also places an automatic stay to prevent creditors from performing collections.

In a Chapter 11 case, the trustee monitors the reorganization process, including monitoring how the debtor runs the business and submits payments throughout the process. The trustee also administers the meeting of creditors, where creditors can meet with the debtor and be present while the debtor answers questions under oath. In this meeting, creditors have the chance to object to proposed plans. Per chapter 11 of the bankruptcy code, debtors in these cases must pay a quarterly fee for the trustee's services based on the amount of debt there is. The trustee has the power to file a motion with the court and have a case dismissed if the debtor does not comply with court rules. The trustee is also responsible for creating the creditor's committee, consisting of the creditors who hold the seven largest unsecured claims in the case. The committee meets with the debtor to plan and investigate how the debtor operates the business and complies with bankruptcy law.

Chapter 11 bankruptcy can last for years unless the court dismisses the case or is interested in quickly resolving the matter. Once the payment plan has concluded, the court issues a final decree stating that the debtor has administered the debts entirely.

What is Chapter 12 Bankruptcy?

Chapter 12 bankruptcy is reserved for family farmers and family fishermen with a regular annual income. Family farming is defined as organizing agricultural, forestry, pastoral, and aquaculture production, managed by a family dependent on the family's labor. Of all 544,463 bankruptcy filings in 2020, chapter 12 only makes up 552 of them. Family farmers who are experiencing financial distress and cannot pay off debts can create a payment plan through the bankruptcy court to reorganize and create a three to a five-year repayment plan.

In Chapter 12 cases, debtors must file a petition with the bankruptcy court in the district where the debtor resides. The bankruptcy forms typically call for the following information:

A complete list of creditors and claims;
Frequency, amount, and source of the debtor's income;
A full list of all properties;
A detailed list of all farming and living expenses.

Once the court receives the claim, the judge appoints a trustee to the case to oversee operations and manage the distribution of payments to creditors. The court also enacts an "automatic stay" on debt collections, meaning that creditors can no longer come to collect debts as long as the case is in effect. The court sends a notice of automatic stay to all creditors, along with the date, time, and location of the creditors' meeting. In the creditors' meeting, the trustee questions the debtor while the debtor is under oath. The creditors are also invited to ask questions, give testimony, and object. Once all parties agree upon a payment plan, the court sets a hearing date to confirm the plan.

The payment plan must provide full payment of priority claims, while the plan should allocate secured creditors at least the value of the collateral given as security. Unsecured claims, however, do not need to be paid in full in a chapter 12 bankruptcy case. When the debtor completes all payments, the bankruptcy court discharges all remaining debts. If a debtor fails to make the payments associated with the plan, the court has the power to dismiss the case entirely or convert it to a Chapter 7 proceeding. If the conversion happens, the debtor's property is at risk of liquidation. Chapter 12 makes it possible to receive a "hardship discharge" even if the debtor has not completed the payment plan.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy applies to individuals experiencing debt who need time to pay back creditors. This chapter is an option for debtors with a steady stream of income who do not want to risk the liquidation of their property and assets. 28% of all bankruptcy filings in the United States in 2020 were chapter 13 filings. Claiming Chapter 13 bankruptcy can save debtors from home foreclosure and lawsuits due to lack of payment while consolidating their debt and paying creditors at their own pace. Chapter 13 functions similarly to a debt consolidation loan and offers an automatic stay of protection while the plan is in effect. A bankruptcy petition requires a complete list of assets, liabilities, and creditors. Debtors must also pay a $235 case filing fee and a $75 administrative fee upon filing. However, the court can work with the debtor on a payment plan if needed.

The trustee appointed to a chapter 13 case is responsible for collecting and disseminating payments and holding the meeting of creditors. The debtor must attend the meeting of creditors, while creditors have the option of attending. In the meeting, the trustee places the debtor under oath and asks questions regarding the debtor's financial situation. The trustee, debtor, and any present creditors work on creating a three to five-year payment plan. Within 30 days of the filing, the debtor must make payments to the trustee. These payments must be made even if the court has not approved the plan yet. Throughout the payment period, involved parties can modify the plan if creditors object or the debtor experiences a change in circumstance, making them unable to pay.

The main requirement to earn a discharge in a chapter 13 case is completing the payment plan. The debtor must also confirm that:

All obligations have been fulfilled;
They have not received a discharge in another chapter 13 bankruptcy case in the last two years and chapter 7, 11, and 12 in the previous four;
They have completed a financial management course.

A discharge is essentially the release of the debtor from all liability of remaining debts. Similar to Chapter 12, Chapter 13 also provides for a hardship discharge. In this case, the court will recognize that the debtor was not at fault for not paying debts due to circumstances outside of their control. It is also possible to receive a hardship discharge if the total amount of payment is more than the total in a Chapter 7 case.

What is Chapter 15 Bankruptcy?

Chapter 15 of the bankruptcy code is relatively new and is often referred to as "cross-border" bankruptcy. This chapter of bankruptcy was first introduced in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. In 2019, there were 130 chapter 15 bankruptcy filings. The purpose of chapter 15 bankruptcy is to deal with insolvency involving claimants, debtors, and assets in multiple countries. This process often consists of a debtor in a foreign country claiming United States bankruptcy. Typically, a debtor who claims chapter 15 bankruptcy in the United States has already undergone bankruptcy proceedings in their country of residence, making Chapter 15 bankruptcy an ancillary case to the foreign bankruptcy case. The five main objectives of chapter 15 bankruptcy are:

To facilitate and enable cooperation between U.S. courts and foreign courts;
Legal assurance for foreign trade and investments;
Efficient and impartial management of insolvency that protects all of the involved parties' interests;
Protect the debtor's assets while increasing their value;
Preserve employment and protect investments by protecting insolvent businesses with interests and assets in the United States.

A Chapter 15 case can either be a "foreign main proceeding" or a "foreign non-main proceeding." In a main proceeding, the debtor's interests lay mostly in the United States, while non-main proceedings deal with debtors who have interest outside of the United States. Upon filing a main proceeding, the bankruptcy court places an automatic stay on debt collections and foreclosures. The court also permits the appointment of a trustee or examiner to oversee the debtor's actions in the other country.

Chapter 15 also allows the United States bankruptcy court to offer protections that the foreign country does not provide, as long as the protections are in accordance with U.S. law. The chapter gives foreign creditors the chance to participate in U.S. bankruptcy cases and prevents discrimination against those creditors. Foreign creditors can also file bankruptcy against debtors under Chapter 15, meaning that Chapter 15 allows for involuntary bankruptcy filings to be made against debtors who hold assets in the United States. The bankruptcy court in the United States has limited jurisdiction in that it covers only the assets in the country.