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Types/Chapters of Bankruptcy


Chapter 7, known as “Liquidation”, is the most common form of bankruptcy used by individuals. Under chapter 7, a court-appointed bankruptcy trustee takes over the debtor’s non-exempt assets, reduces them to cash, and then distributes the money to creditors. Typically, the remaining debt is usually discharged, or eliminated.

Chapter 9, named the “Adjustment of Debts of a Municipality” allows municipalities (i.e. cities, towns, villages, counties, school districts, etc.) to continue operating while paying creditors through a court-approved reorganization plan.

Chapter 11, entitled “Reorganization”, is used most frequently by commercial enterprises who wish to continue operating their business. Like Ch. 9, Ch. 11 allows the debtor to continue to function, maintain ownership of all assets, and work out a reorganization plan to pay off creditors. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the debtor has a 120-day timeframe in which to submit a reorganization/payment plan. If the debtor fails to submit a plan within this period, creditors may submit their own plans. Under Ch. 11, a debtor typically goes through a period of consolidation and comes out with a reduced debt and restructured business.

Chapter 12, named “Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income”, is created for farm owners and fishermen. In a Ch. 12 filing, the debtor retains ownership and control of all his assets and tries to work out a reorganization plan to pay off creditors. The proposed plan typically does not exceed than three years, but a court may approve a plan that does not exceed five years. Ch. 12 allows the farmer or fisherman to continue operating his/her business while the plan is carried out.

Chapter 13, named “Adjustment of Debts of an Individual with Regular Income”, is similar to Ch. 11, but for individuals. In a chapter 13 filing, the debtor retains ownership of all assets, and tries to work out a three to five-year repayment plan to pay off creditors. Chapter 13 may be preferable to chapter 7 because it allows debtors to keep possession of valuable assets and propose a plan to repay creditors over the repayment period.

Chapter 15, entitled “Ancillary and Other Cross-Border Cases”, is a new chapter added to the Bankruptcy Code in 2005. Ch. 15deals with cases of cross-border insolvency. In other words, Ch. 15 applies to cases where a debtor or his/her property is subject to United States laws and foreign laws at the same time.

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