What is Bankruptcy?
Overview of Bankruptcy
Bankruptcy in the United States is designed to allow individuals, businesses and corporations to eliminate or extend payments of some or all debts. There are basically two categories of bankruptcy: liquidation and reorganization. The categories are then divided into Chapters. Each Chapter has its own set of qualification rules and regulations.
Chapter 7 (Liquidation) of the Bankruptcy Code allows liquidation or sale of nonexempt property. All property not protected by the Bankruptcy Code can be sold with the money from the sale used to pay debts. Individuals filing Chapter 7 can keep certain protect property such as one vehicle for each licensed driver, a boat, family home, furniture, clothing, family pets, furs, jewelry, electronic equipment, books, art, collectibles, firearms, hobby equipment, and insurance policies. There is a maximum dollar value the debtor can keep in property. If any property exceeds that amount then the bankruptcy trustee can seize and sell the property to pay outstanding debts. Once Chapter 7 is filed and discharged, the debtor will not have to pay any of the creditors listed in the bankruptcy so there are no payment plans. A liquidation bankruptcy is designed to provide the debtor with a fresh start. Debts with liens are not discharged and payments are still the responsibility of the debtor. Caution should be taken when filing Chapter 7 because this could result in the loss of some property and items. A Chapter 7 typically last 3 to 6 months.
An alternative to Chapter 7 is Chapter 13 Individual Debt Adjustment (Reorganization) which allows debtors to catch up on past due payments by means of a monthly payment plan. Debtors with regular income are required to make monthly installments over a three to five year period. There are some advantages to filing Chapter 13 over Chapter 7:
- Individuals can stop foreclosure and make delinquent mortgage payments over time
- Secured debt payments (debts with collateral) can be extended over the period of the bankruptcy
- Individuals will not have direct contact with creditors. All contact will go through the bankruptcy trustee.
- Individuals are allowed to keep many of their assets.
As of April 1, 2016, individuals and small businesses are eligible to file Chapter 13 as long as the unsecured debts (debts with no collateral) are less than $394,725.00 and secured debts are less than $1,184,200.00. A Chapter 13 bankruptcy can last up to five years.
Chapter 11 Reorganization is generally reserved for corporations and partnerships. Chapter 11 is designed to keep a company in business while paying monthly installments to the bankruptcy trustee. Chapter 11 provides businesses the chance to restructure debts and move towards a stable organization. Organizations who file Chapter 11 can remain in bankruptcy for many years.
Chapter 12 (Family Farmer’s Debt Adjustment) is a reorganization bankruptcy reserved for family farmers and family fishermen. It allows distressed farmers and fishermen to create a payment plan to repay all or part of their debts. This is similar to Chapters 11 except it eliminates many of the barriers debtors encounter. Chapter 12 is more streamlined, less complicated and less expensive than Chapter 11. To qualify for Chapter 12, the family must receive more than 50% of their income and at least 80% of the debt from commercial farming or fishing with debts less than $4,153,150 for farmers or $1,924,550 for fishermen (as of April, 2016).
Chapter 15 (Ancillary and Cross-Border Cases) was added to the Bankruptcy Code in 2005. This type of bankruptcy allows organizations with foreign representatives to file bankruptcy in the United States.
Debts not Dismissible
It should be noted that not all types of debts can be eliminated through bankruptcy. Debts such as child and spousal support, most taxes, student loans, items not listed on the bankruptcy, fines and penalties for violating the law, and debts for personal injury or death caused by intoxicated driving cannot be dismissed.
The bankruptcy process is complex and loaded with legal jargon. Always consult a qualified bankruptcy attorney for advice.