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Understanding Bankruptcy Chapters
Bankruptcy laws are complex and confusing to most people. Until someone is forced to file for bankruptcy due to the potential of losing their home to foreclosure or they have had credit card judgments placed against them, they may not understand the various chapters of the bankruptcy laws. Here are the basic types of bankruptcy and how they are typically used
Chapter 7 - This is the most common type and the easiest form of bankruptcy to file. In effect, the debtor forfeits all non-exempt assets, which are sold and used to pay off debt. Any remaining debt will then be discharged, unless it falls under fraud. This chapter also non-exempts debts such as student loans, taxes or support. This type of bankruptcy is used by individuals or businesses;
Chapter 9 - This form of bankruptcy is used only by municipalities. This federal filing allows a state, city or town to discharge their debts;
Chapter 11 - This is more commonly referred to as a reorganization plan or corporate bankruptcy. Chapter 11 allows businesses to reorganize their debts to make them easier to pay. Some wealthy individuals may elect to use this form of bankruptcy though it is typically used by companies;
Chapter 12 - This chapter of the bankruptcy laws is specifically designed for those who make a living as fishermen or farmers;
Chapter 13 - Known more commonly as the wage earners bankruptcy, this allows debtors to repay their debts using a court-approved payment plan;
Chapter 15 - Primarily used by foreign debtors who may owe debts in both the United States and in foreign countries.
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Individuals and Chapter 11
Can individuals file Chapter 11 bankruptcy? Yes, they can file Chapter 11 though it may not be the best option for most filers. In April of 2005, President George W. Bush signed into law "Bankruptcy Abuse Prevention, Consumer Protection Act" which specifically provided that a debtor would be required to pay back their debts if they could do so. This change may result in more individuals electing to use Chapter 11 bankruptcy versus Chapter 7.
Chapter 11 would typically be utilized by companies, individuals with a high net worth, or business partnerships as a method of reorganizing their debt. It is important to note that once the bankruptcy is discharged, that the debt is considered paid. Chapter 11 filings involve a trustee that typically deals with payments, liquidation proceedings (where necessary) and filing of court-required documents. Chapter 11 (and other chapters) specifically state: "Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders.11 U.S.C. § 523(a)."
Most individuals will find that a Chapter 7 (personal bankruptcy) or a Chapter 13 (wage earners bankruptcy) is the most sensible option for them. Chapter 11 is ideal for those who have a small business that is organized as a partnership or non-C Corporate structure. This is also the proper chapter for those who may have high-value assets.
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Disclaimer: This article is for informational purposes only. Anyone who is considering filing for bankruptcy should contact an attorney with the proper credentials to provide legal information.
United States Courts
- Bankruptcy Court: Wikimediacommons.org/Nyttend Public Domain
- Bankruptcy Cartoon: via Wikimediacommons.org/Cartoosh CC-BY-SA-3.0