Bankruptcy is a state of being completely unable to pay your debts and is broken down into two categories: Voluntary Bankruptcy and Involuntary Bankruptcy. The objective in both cases is a fair settlement of claims and distribution of assets. Filing a petition is the first step in the bankruptcy process and stays on a person’s record for 10 years. Important chapters in the Bankruptcy Reform Act are 7, 9, 11, 12, and 13.
Chapter 7 Bankruptcy is the most popular and well-known method and is also referred to as liquidation. In this method, a court appointed trustee distributes assets among creditors and sets up interim financing options. If there are no assets then there is nothing to distribute and the creditors get nothing. The petitioner will often still be accountable for a small portion of the debt however. In this method there is the Chapter 7 discharge which releases the petitioner from personal liability for most debts. This can sometimes be denied if the debtor fails to explain loss of assets, commits perjury, or unlawfully disposes of assets.
Chapter 9 Bankruptcy is rarely used and involves the reorganization of municipalities such as cities, towns, and school districts. This is often accomplished by extending debt maturities, reducing the amount of interest or principal, or completely refinancing the loan. What makes Chapter 9 Bankruptcy particularly different from the others is that there is no distribution of assets involved as it would actually violate the 10th amendment of the constitution.
Chapter 11 of the Bankruptcy Code is primarily utilized by corporations or partnerships and a plan is usually devised to reorganize the business and keep it alive. It’s interesting to know that this method of bankruptcy is the most complex and generally most expensive. Unless the court rules otherwise, the debtor remains in control of the business and may work with the creditors to restructure the debt, reschedule the payments, and possibly new Loans are granted.
Chapter 12 Bankruptcy concerns farmers and fishermen with regular annual income. Using this method, debtors prose a plan to pay back the debt, strictly within 3 to 5 years. It is much more simple and inexpensive than Chapter 11. Also, bankruptcy under this chapter is strictly voluntary. Unless granted an extension, the debtor must file a plan of repayment within 90 days after filing the petition. The plan doesn’t have to pay unsecured claims completely, but at least must commit to all of the debtor’s projected disposable income.
Chapter 13 Bankruptcy, like Chapter 7, is for individuals. In this plan, individuals work out a plan with their debtors by which they can pay back the debts they owe over 3 to 5 years. In this form of bankruptcy, no assets are distributed among debtors. There are many advantages in choosing this method one of which being the debtor may save his or her home from foreclosure as terms are worked out with the mortgage lender; however, minimum mortgage payments must still be paid in order to save the home.