The Five Chapters of Bankruptcy

March 18, 2015

 

Every year thousands of hard working Americans find themselves overburdened with debt and unrelenting creditors. Bankruptcy often seems a viable solution. While Chapters 7 and 13 are the most common, there are actually five chapters in the Bankruptcy Code. Whether you’re interested in filing as an individual, corporation, or municipality, it’s important to understand how various bankruptcy chapters work. The following is a brief analysis of each provision.

 

Chapter 7, one of the more common bankruptcy types is also known as liquidation. This category can be utilized by both individual debtors and business debtors.  During a chapter 7 bankruptcy, the trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of these assets to pay creditors.

 

 Chapter 9 of the Bankruptcy Code provides for reorganization of municipalities (which include cities, villages, counties, taxing districts, municipal utilities, and school districts).The purpose of chapter 9 is to provide a financially-distressed municipality protection from its creditors while it negotiates and advances a plan for adjusting its debts. Reorganization of the debts of a municipality is generally established either by extending debt maturities, reducing the amount of interest, or refinancing debts by obtaining new loans. Unlike other chapters, Chapter 9 has no provision in the law for liquidation of assets of the municipality and distribution of those proceeds to creditors.  Furthermore, municipalities may only file under Chapter 9.

 

Chapter 11 Bankruptcy is intended primarily for the reorganization of businesses with heavy debt burdens. Corporations are generally associated with Chapter 11, but it is also available to small businesses. A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Chapter 11 is often called the “reorganization chapter,” it allows corporations to reorganize without having to liquidate all available assets. In filing for Chapter 11, the debtor presents a plan to creditors that will allow the debtor to reorganize business affairs and redirect its business financially.

 

 Chapter 12 is designed for "family farmers" or "family fishermen" with "regular annual income."  Not as common as other forms, Chapter 12 enables financially distressed family farmers and fishermen to propose a plan that will allow them to repay all or part of their debts. Under chapter 12, debtors propose a repayment plan to make installments to creditors over three to five years.

 

Chapter 13 of the Bankruptcy Code is known as the wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. If you’re a business owner you can file for Chapter 13 bankruptcy as an individual. It allows you to include business-related debts for which you are personally liable in your petition.

 

 If you are considering filing bankruptcy, or are trying to determine if bankruptcy is right for you, you may want to consult with an attorney who can review your specific circumstances and advise you on your next steps.  Feel free to contact RMA & Associates, LLC, Attorneys at Law, today at 301-979-7427 and mention this blog post for a free bankruptcy consultation.

 

The information contained within this blog post is provided as general informational purposes only and are not intended to be interpreted as legal advice of any nature. Furthermore, nothing contained in this blog or in this website is intended to create an attorney-client relationship.   If you require legal advice, please consult with an attorney of your choice, who is licensed to practice in your jurisdiction.

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