A Bankruptcy Lawyer’s Blog

Bankruptcy – The Six Different Chapters That Exist

Given the current tough economic times, the concept of bankruptcy has unfortunately been garnering a lot of attention. Most people know of the concept, but not much else. In this article, we take a look at the 6 different chapters of bankruptcy that exist.

What is a chapter of bankruptcy? The term refers to the sections of bankruptcy law that govern the process. Most articles incorrectly note there are two or maybe three chapters for filings. Almost everyone knows about Chapter 7 and Chapter 11. A few also know about Chapter 13 filings. As the numbers would seem to suggest, there are also Chapter 9, 12 and 15 filings that can occur. Let’s take a closer look.

Chapter 7 is the best known form of bankruptcy. When you file a Chapter 7 petition, you are asking the court to wipe the slate clean. You’ll give up all your non-exempt assets to get rid of all your debts. The court will take over your assets, sell them off to produce cash and then distribute the cast to the creditors. In exchange, the creditors give up their rights to make any other claims on you.

There is one caveat to this discussion – the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. President Bush and a Republican Congress passed a bill into law that creates a “means test” to determine whether debtors can get full relief under Chapter 7. If the debtor makes in excess of certain amounts, he or she cannot get the slate wiped clean and must agree to a plan to repay the creditors.

Chapter 13 works just as Chapter 7 does, but with one big difference. Let’s say an individual runs into financial problems, but has a sizeable asset that can’t be turned into money. This is common these days where a person might be living in a house with lots of equity, but is otherwise cash poor. Since they can’t sell the home, they have no way of raising money. Chapter 7 allows the person to file for an “adjustment of debt”. Essentially, a plan for repayment of outstanding debts over three to five years is created and the debtor gets to keep the valuable asset.

Chapter 11 is similar to Chapter 13, but is intended for business organizations. When people talk about General Motors filing bankruptcy, they are talking about Chapter 11. In Chapter 11, a debtor will try to come up with a reorganization plan. The trustee, court and debtor always try to slash the debts owed to creditors. The creditors try to fight back. If a plan cannot be agreed upon, the court may order the liquidation of the debtor with parts of the company being sold off. This may be the fate of GM if it goes into bankruptcy.

Chapter 9 is just like Chapter 11, but is restricted to certain debtors – municipalities. This essentially means when cities or towns go belly up. This is occurring as we speak because municipalities are losing tax revenue as more and more homes go into foreclosure.

Chapter 12 is more like Chapter 13. Once again, the primary difference has to do with the parties that can file for it. Chapter 12 is restricted to family farmers and fishermen. Why? Because they have strong lobbiest!

Chapter 15 is our final area of code a party can seek bankruptcy through. It covers cross-border cases. If GM goes bankrupt, it might be able to seek out a Chapter 15 filing because much of the actual building of cars takes place outside of the country in Mexico, Canada and other locations. Chapter 15 is essentially the same as Chapter 11, but with the cross-border issues thrown in to make things really confusing!

While it is true that most individuals will file for Chapter 7 or Chapter 11 relief, it is vital to know there are other options available. If you are a family farmer who likes to fish across the border, there are a lot of them.

Gerard Simington writes for BankruptcyAttorneysandLawyers.com – get the bankruptcy facts and more information