It may surprise you to know that there are six different types of bankruptcy under U.S. Federal Law. It is most common to hear about individuals filing a Chapter 7 or Chapter 13, and to hear about businesses filing for a Chapter 11. The other types of bankruptcy are less common and less public. Below, we explore each type of bankruptcy and who usually files for it:
Chapter 7- Liquidation
The most commonly filed bankruptcy amongst individuals. If a person finds themselves owing more money to creditors than they have, or can foreseeably earn, Chapter 7 is the best option. The assets that person owns will be liquidated and used to pay off their debts. After that, the bankruptcy is usually dismissed. Chapter 7 is often referred to as a “fresh start”.
Chapter 9- Adjustment of Debts of a Municipality
A less common and more obscure bankruptcy, it applies only to municipalities (cities, towns, counties). To file, the municipality must be 1) authorized to do so under state law, 2) unable to pay off its debts, 3) have a desire to adjust its debts, and 4) obtain agreements from the majority of its creditors. In 2013, Detroit, Michigan filed a Chapter 9 bankruptcy.
Chapter 11- Business Reorganization
Primarily used by financially struggling corporate entities. A business can “reorganize” their debt by reducing/eliminating unwanted debts while maintaining those that are necessary to continue business operations.
Chapter 12- Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income
As the title points out, this bankruptcy is specifically for individuals who are family farmers or fishermen. It is similar to a Chapter 13 below, but with additional benefits. Specifically, it allows for the farmer/fisherman to continue their farming/fishing operations.
Chapter 13- Individual Reorganization
Like a Chapter 11, but mostly used by individuals. Chapter 13 is often call the “wage earner” bankruptcy, because the individual must have a reliable source of income. Their finances are reorganized into a plan that allows the them to pay back their creditors over three to five years while maintaining control and ownership of their assets.
Chapter 15- Ancillary and Other Cross-Border Cases
Used mostly as an ancillary case to international corporate bankruptcies. A Chapter 15 allows for foreign bankruptcy proceedings to have access to the U.S. Bankruptcy Courts.
While not usually drastic, the rules and types of bankruptcies do change from year to year. If a certain law becomes obsolete, it is deleted, but the numbers of the existing laws do not change. That is why you don’t see any Chapter 6 or Chapter 10. They once existed, but have since been deleted.
If you are considering filing a Chapter 7 or Chapter 13, give a skilled bankruptcy lawyer Phoenix AZ relies on a call and learn what your options are.
Thanks to our friends and contributors from Kamper Estrada, LLP for their insight into bankruptcy practice.