Bankruptcy

Bankruptcy filings in the United States are categorized by which chapter of the Bankruptcy Code applies. For example, Chapter 7 involves the liquidation of assets, Chapter 11 deals with company or individual reorganizations, and Chapter 13 arranges for debt repayment with lowered debt covenants or specific payment plans.

Chapter 7 Bankruptcy

Most people file for Chapter 7 bankruptcy, which allows you to dispose of unsecured debts, such as credit card balances and medical bills.

You must liquidate property to repay some or all of your unsecured debts if you have nonexempt assets, such as family heirlooms (collections with high valuations, like coin or stamp collections), second homes, or investments like stocks or bonds.

When you file Chapter 7 bankruptcy, you essentially sell off your assets to clear debt. People who have no valuable assets and only exempt property—such as household goods, clothing, tools for their trades, and a personal vehicle worth up to a certain value—may end up repaying no part of their unsecured debt.

Chapter 11 Bankruptcy

Businesses often file for Chapter 11 bankruptcy, with the goal of reorganizing and remaining in business. Filing Chapter 11 bankruptcy gives a company the opportunity to create plans for profitability, cut costs, and find new ways to increase revenue. Its preferred stockholders, if any, may still receive payments, though common stockholders will be last in line.4

For example, a housekeeping business filing Chapter 11 bankruptcy might increase its rates slightly and offer more services to become profitable. Chapter 11 bankruptcy allows the business to continue conducting its business activities without interruption while working on a debt repayment plan under the court’s supervision. In rare cases, individuals can also file for Chapter 11 bankruptcy.

Chapter 13 Bankruptcy

Individuals who make too much money to qualify for Chapter 7 bankruptcy may file under Chapter 13, also known as a wage earner’s plan. It allows individuals—as well as businesses, with consistent income—to create workable debt repayment plans.

The repayment plans are commonly in installments over the course of a three- to five-year period. In exchange for repaying their creditors, these debtors are allowed, per the courts, to keep all of their property, including otherwise nonexempt property.6

Other Bankruptcy Filings

While Chapter 7, Chapter 11, and Chapter 13 are the most common bankruptcy proceedings, there are several other types:

• Chapter 9 bankruptcy is available to financially distressed municipalities, including cities, towns, villages, counties, and school districts. Under Chapter 9, municipalities do not have to liquidate assets to repay their debts but are instead allowed to develop a plan for repaying them over time.7
• Chapter 10 bankruptcy, which effectively ended in 1978, was a form of corporate bankruptcy that has been supplanted by Chapter 11.
• Chapter 12 bankruptcy provides relief to family farms and fisheries. They are allowed to maintain their businesses while working out a plan to repay their debts.8
• Chapter 15 bankruptcy was added to the law in 2005 to deal with cross-border cases, which involve debtors, assets, creditors, and other parties that may be in more than one country. This type of petition is usually filed in the debtor’s home country.