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Bankruptcy Chapters

HomeArea of Law BankruptcyBankruptcy Chapters

Under the Bankruptcy Code there are six basic types of bankruptcy chapters,

each cases are traditionally given the names of the chapters that describe them.

Chapter 7

  • Entitled as Liquidation, contemplates an orderly, court-supervised procedure
    • by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors.
  • Because there is usually little or no nonexempt property in most chapter 7 cases,
    • there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.”
    • A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court.
  • In most chapter 7 cases,
    • if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts.
    • The debtor normally receives a discharge just a few months after the petition is filed.
  • Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7.
    • If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.

Chapter 9

  • Entitled as Adjustment of Debts of a Municipality, provides
    • essentially for reorganization, much like a reorganization under chapter 11.
  • Only a “municipality” may file under chapter 9, which includes
    • cities and towns,
    • as well as villages,
    • counties,
    • taxing districts,
    • municipal utilities, and
    • school districts.

 

Chapter 11

  • Entitled as Reorganization,
    • ordinarily is used by commercial enterprises that desire to continue operating a business and
    • repay creditors concurrently through a court-approved plan of reorganization.
  • The chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan.
    • The court ultimately approves (confirms) or disapproves the plan of reorganization.
  • Under the confirmed plan,
    • the debtor can reduce its debts by repaying a portion of its obligations and discharging others.
    • The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability.
  • Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.

 

Chapter 12

  • Entitled as Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income,
    • provides debt relief to family farmers and fishermen with regular income.
  • The process under chapter 12 is very similar to that of chapter 13, under which
    • the debtor proposes a plan to repay debts over a period of time – no more than three years unless the court approves a longer period, not exceeding five years.
  • There is also a trustee in every chapter 12 case
    • whose duties are very similar to those of a chapter 13 trustee.
    • The chapter 12 trustee’s disbursement of payments to creditors under a confirmed plan parallels the procedure under chapter 13.
  • Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.

Chapter 13

  • Entitled as Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor
    • who has a regular source of income.
  • Chapter 13 is often preferable to chapter 7 because
    • it enables the debtor to keep a valuable asset, such as a house, and because
    • it allows the debtor to propose a “plan” to repay creditors over time – usually three to five years.
  • Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test.
    • At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on
    • whether it meets the Bankruptcy Code’s requirements for confirmation.
  • Chapter 13 is very different from chapter 7
    • the chapter 13 debtor usually remains in possession of the property of the estate and
    • makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan.
  • Unlike chapter 7, the debtor does not receive an immediate discharge of debts.
    • The debtor must complete the payments required under the plan before the discharge is received.
    • The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.
    • The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.

Chapter 15

  • Entitled as Ancillary and Other Cross-Border Cases, is to provide an effective mechanism for dealing with cases of cross-border insolvency.
  • This publication discusses the applicability of Chapter 15 where a debtor or its property is subject to the laws of the United States and one or more foreign countries.

 

In addition to the basic types of bankruptcy cases,

Bankruptcy Basics provides an overview of the Service members’ Civil Relief Act, which, among other things,

provides protection to members of the military against the entry of default judgments and gives the court the ability to stay proceedings against military debtors.

This publication also contains a description of liquidation proceedings under the Securities Investor Protection Act (“SIPA“).

Although the Bankruptcy Code provides for a stockbroker liquidation proceeding, it is far more likely that a failing brokerage firm will find itself involved in a SIPA proceeding.

The purpose of SIPA is to return to investor’s securities and cash left with failed brokerages.

Since being established by Congress in 1970, the Securities Investor Protection Corporation has protected investors

who deposit stocks and bonds with brokerage firms by ensuring that every customer’s property is protected, up to $500,000 per customer.

 

The bankruptcy process is complex and relies on legal concepts like the “automatic stay,” “discharge,” “exemptions,” and “assume.”

Therefore, the final chapter of this publication is a glossary of Bankruptcy Terminology which explains,

in layman’s terms, most of the legal concepts that apply in cases filed under the Bankruptcy Code.

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