Bankruptcy law may have different meanings for different people. While bankruptcy may be a disaster for those who are unable to meet their financial obligations, it may also be an opportunity for those who are unable to meet their financial obligations due to the financial crunch that has visited their businesses.
What is the meaning of Bankruptcy?
In common parlance, bankruptcy refers to a legal process that allows businesses and individuals to either completely discharge their debts or pay them off over time. The rules and procedures established by the United States Bankruptcy Courts govern the entire process. Debtors do not always request bankruptcy; in some cases, creditors can compel debtors to file for bankruptcy.
Types of Bankruptcy
There are six types of bankruptcies according to the law. However, not all bankruptcies are frequently used by debtors or creditors. Municipalities, for example, can declare bankruptcy, and farmers can do the same. The most common types of bankruptcies are addressed in Chapters 7, 11, and 13 of the Bankruptcy Code.
Chapter 7 Bankruptcy – Liquidation Under the Bankruptcy Code
Bankruptcy under Chapter 7 requires the debtor to transfer the majority of his assets to a bankruptcy trustee, except certain possessions such as furniture, clothing, and household goods. The bankruptcy trustee sells the debtor’s property to recover the funds needed to pay off the debt. The sale of the debtor’s assets by the bankruptcy trustee means that the debtor is now free of most of his debt, though certain debts, such as school loans, alimony, and child support, must still be paid.
Chapter 9 Bankruptcy – Municipality Bankruptcy
The purpose of Chapter 9 is to protect a financially distressed municipality from its creditors while it develops and negotiates a debt-reduction plan. A municipality’s debts are typically reorganized by extending debt maturities, lowering the amount of principal or interest, or refinancing the debt with a new loan.
Chapter 11 Bankruptcy – Reorganization Under the Bankruptcy Code
Bankruptcy under Chapter 11 is usually resorted to in case the debtor is a business house or someone with considerable assets at their disposal. This type of bankruptcy allows the debtor to exercise control over routine business affairs. The debtor, creditors, and the bankruptcy trustee work as a team to chart out a plan that will help the debtor to repay some or all of the existing debt.
Individuals and businesses can both seek relief under Chapter 11.
Chapter 12 Bankruptcy – Bankruptcy for a Farmer or a Bankruptcy for a Fisherman
Chapter 12 is intended for “family farmers” or “family fishermen” who make a “regular annual income.” It enables financially distressed family farmers and fishermen to propose and carry out a repayment plan for all or a portion of their debts. Debtors propose a repayment plan to creditors in installments over three to five years under Chapter 12. In general, the plan must provide for payments to be made over a three-year period unless the court grants a longer period “for cause.” However, unless the plan proposes to pay 100% of any domestic support claims (i.e., child support and alimony), it must be for a period of five years and must include all of the debtor’s disposable income. A plan may not provide for payments to be made over a period of more than five years.
Chapter 13 Bankruptcy – Individual Debt Adjustment
Bankruptcy under Chapter 13 does not require the debtor to either hand over their assets to the bankruptcy trustee or the sale thereof. Instead, the debtor is simply required to commit a significant portion of their future income or profit, which is settled by the Bankruptcy Court, towards the clearing-off of their existing debt.
Chapter 15 Bankruptcy – Ancillary and Other Cross-Border Cases
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added Chapter 15 to the Bankruptcy Code. It is the domestic adoption by the United States of the Model Law on Cross-Border Insolvency promulgated in 1997 by the United Nations Commission on International Trade Law (“UNCITRAL”), and it replaces section 304 of the Bankruptcy Code. Because chapter 15 is based on a UNCITRAL source, the US interpretation must be coordinated with the interpretation provided by other countries that have adopted it as internal law in order to promote a uniform and coordinated legal regime for cross-border insolvency cases.
Impact of Bankruptcy Proceedings On Debtor’s Credit History
Initiation of bankruptcy proceedings, undoubtedly, makes it difficult for the debtor to obtain lines of credit. But there is a silver-lining to this dark cloud of bankruptcy. Despite the bankruptcy staying on the debtor’s credit report for up to 10 years, effective financial planning and astute management of resources can result in significant improvement in the credit standing within a few years.
While the information presented is correct as of the publication date, it should not be cited or relied on as legal authority. This article is not a replacement for the advice of a qualified Bankruptcy attorney, accountant, or financial advisor, nor is it a step-by-step guide to filing for bankruptcy.