Bankruptcy is not a foreign term to many. At one time or another we’ve all heard of chapter 7, 11, and 13-which are all types of bankruptcy. The different types of bankruptcy get their name from the chapters of the U.S Bankruptcy Code. Bankruptcy received an increase in attention in the media, due to the 2016 presidential election between former Secretary of State Hillary Clinton and now former President Donald Trump. In the midst of the back and forth attack by both candidate, former President Donald Trump business bankruptcies were scrutinized and highlighted.

Many people have negative feelings towards bankruptcy due to misinformation and a long history of stigma surrounding it. The attack on former President Donald Trump specifically about his bankruptcies by other politicians and the media is a sentiment shared by many people in the country. Bankruptcy is available to individuals, businesses, and governments and all parties participate in it. But we see individuals carry the weight of shame more than other parties. Bankruptcy is nothing to be ashamed of. Today we will cover what it is, and the different types in the U.S Bankruptcy Code.

WHAT IS BANKRUPTCY

Experian.com defines bankruptcy as “a legal process overseen by federal bankruptcy courts. It’s designed to help individuals and businesses eliminate all or part of their debt or to help them repay a portion of what they owe.” Many people understand the term in a more loose manner to mean to lose all money or assets. That is not wrong but it is important to understand that bankruptcy is a legal procedure that is outlined by the law that explains how each type should be handled.

Bankruptcy is not only reserved for businesses and individuals but also governments, municipalities or any entity that borrows and owes money to another entity. 

Here is an example to clearly differentiate the difference between financial ruins-which a person may understand bankruptcy to be-and what bankruptcy is. If a person finds themselves in financial hardship where they are unable to pay their debt or outright refuse to do so, a number of consequences will ensue. The creditor can send the account to a collection agency or take legal actions. Legal action can take the form of a lawsuit where if the court rules in favor of the creditor can lead to assets being taken without notification, lien placed on assets, and garnish of paychecks. If a person should lose all their assets in this manner, they would be financially ruined but it is not bankruptcy.  Bankruptcy is a legal action taken through the federal courts that relinquishes the debtor responsibility of the debt after certain stipulations are met.

TYPES OF BANKRUPTCY

Chapter 7

This bankruptcy is common and many people are familiar with it. Assets are liquidated and distributed to creditors in order of priority. A trustee may be appointed by the court to run a business and liquidate assets. If there is still debt that is owed after the liquidation and distribution process that debt is then discharged.

Any person or business can file for Chapter 7. There are eligibility requirements that need to be met before filing can take place. If a person receives a discharge by filing a Chapter 7 they are not allowed to file for another until 8 years. If they receive a discharge from a Chapter 13 then they are not allowed to file for Chapter 7 until 6 years.

Chapter 9

Investopedia.com states that Chapter 9 provides a plan for “governmental entities such as cities, counties, townships, municipalities, taxing districts, and school districts.” to settle their debt with their creditors. The proceedings of a Chapter 9 are different from a Chapter 7 in such a way that the governmental entities are not required to liquidate their assets. It’s common to hear that an individual or a business is filing for bankruptcy. Chapter 9 is less known by many people.

Chapter 10

Chapter 10 is no longer part of the bankruptcy code. According to Investinganswers.com it was eliminated in 1978 by The Bankruptcy Act Of 1978. It was mainly for corporations but due to its complexity and the power it granted trustees over the company’s management, many companies opt not to use it.

Chapter 11

Chapter 11 gives corporations, and in some cases individuals the opportunity to restructure their debt. An individual may choose to file Chapter 11 because they are unable to file Chapter 7 or 13. According to Investopedia.com “Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding.” An individual or company must take great consideration if Chapter 11 is right for them. This type of bankruptcy allows a business to continue to run during the bankruptcy period. Some actions may be prohibited by the courts for example the selling of certain assets. 

Chapter 12

Chapter 12 is unique in the sense that it is for farm and fishery owners. Chapter 12 was added to the bankruptcy code in 1986. The procedures are the same as any other bankruptcy. Owners of farms and fisheries must meet a number criteria to be eligible.

Chapter 13

Those who file for Chapter 13 must come up with a repayment plan and will have between 3-5 years to make payments towards their debt. Whatever amount of debt is left over will be discharged. Their secured and unsecured debt must meet a certain amount before they can be eligible to file. Chapter 13 allows individuals to keep their house if they can keep up with their mortgage and their monthly repayment schedule. Which means a person filing for Chapter 13 income must meet at a certain amount to qualify to be eligible.

Chapter 15

Chapter 15 is a bankruptcy proceeding which provides a way for U.S courts to work with foreign courts during a bankruptcy proceeding. It was created in 2005 for businesses that do businesses in more than one country. Its intention is to protect the interest of creditors in the United States. This is a great example of the bankruptcy code making allowances for a more globalized U.S financial system. Many of the U.S largest companies not only do business in the U.S but also in the world. 

Take for example a U.S corporation that files for bankruptcy and part of the repayment plan is to sell some assets and pay back certain creditors. A company may choose to file bankruptcy in the country they are planning to sell some of their assets. Chapter 15 gives the U.S courts the power to mitigate the bankruptcy so that a repayment plan is fair for a hypothetical U.S creditor.

FINAL THOUGHT

As you can see The U.S Bankruptcy Code provides an opportunity for any individual or entity who are debtors a legal solution for financial distress. It also covers many different circumstances and situations where debtors may find themselves in financial hardship. There is no surprise that The U.S Bankruptcy Code is as complex as it is. It must make allowances for an expansive and ever changing financial system. Not only is the United States economy and financial system very large, but it is interconnected with most if not all economies of the world. The more complex the U.S financial system gets the more the bankruptcy code must adapt to keep up with it.

Individuals that are considering bankruptcy should consult a lawyer experienced in the specific area that applies to the individual. Bankruptcy can be an emotional undertaking so it’s good to have a professional to navigate the legal aspect. The bankruptcy codes are complex and having a professional who can navigate its intricacy can save you time and heartache. Many individuals who choose bankruptcy may feel shame due to the stigma that surrounds it, but they should not. Be grateful that there is a legal process that helps individuals deal with financial hardship. Bankruptcy should be a logical strategic decision. Shame and embarrassment should not be a reason to not file.