Bankruptcy 101: The 6 Chapters Explained

Bankruptcy 101: The 6 Chapters Explained
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Stefanie O'Connell
By: Stefanie O'Connell
Posted: July 3, 2014
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Bankruptcy can provide a much needed relief from overwhelming debts and a fresh start for everyone. Whether you’re an individual, a small business owner or a massive corporation, there’s likely a bankruptcy chapter to meet your needs.

Under U.S. bankruptcy law, there are six different chapters to choose from:

1. Chapter 7 – Liquidation

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Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common bankruptcy chapter filed in the United States.

It involves the sale of the debtor’s non-exempt property and assets, the proceeds of which are distributed to creditors via the bankruptcy trustee.

Exempt property (property you can keep) varies from state to state, but most states allow you to keep some equity in your home, clothing, household furnishings and other necessities like your vehicle.

Chapter 7 bankruptcies are designed to wipe out general unsecured debts like credit cards and medical bills. It is typically used by low-income debtors with few assets.

Those who make too much money will be required to file for Chapter 13 bankruptcy.

Keep in mind Chapter 7 bankruptcies will linger on your credit report for up to 10 years, making it difficult to successfully apply for loans and other financing options.

2. Chapter 9 – Municipalities

Chapter 9 - Municipalities

Chapter 9 bankruptcy is designed specifically for municipalities — cities, towns, school districts, etc.

This form of bankruptcy allows municipalities to reorganize their debts through extended repayment timelines, refinancing or reduction of principal or interest on existing debts.

Municipalities who file for Chapter 9 bankruptcy must file a plan for how they plan to reorganize debts within the limits of bankruptcy.

Chapter 9 bankruptcies are quite rare, with fewer than 500 ever being filed. However, at an estimated $18 to $20 billion, the Detroit bankruptcy was the largest of its kind.

3. Chapter 11 – Reorganization (businesses and wealthy individuals)

Chapter 11 - Reorganization (businesses and wealthy individuals)

Large companies primarily use Chapter 11 bankruptcy, but any business or individual may file – most likely when their debt exceeds the limits of Chapter 13 bankruptcy.

When filing for Chapter 11 bankruptcy, the debtor reorganizes to keep its business alive and proposes a plan to pay creditors over time. It gives companies the chance to stay in business and control the bankruptcy process at the same time.

Chapter 11 bankruptcy cases are generally complex and costly, as they often involve contentious creditors, require the expertise of an experienced attorney and carry a much higher fee of $1,046 to file (compared to a fee of $299 when filing for Chapter 7 bankruptcy).

When snack cake bakery Hostess filed for Chapter 11 bankruptcy in 2012, many people thought it would be the end of delicious treats like Ho Hos and Twinkies. However, because Chapter 11 allows businesses to continue operations, people can still enjoy all their favorite apocalypse-ready treats today.

4. Chapter 12 – Farmers & Fishermen

Chapter 12 - Farmers & Fishermen

Chapter 12 is a subset of bankruptcy designed specifically for family farmers and fishermen. When filing, the indebted farmer or fisherman proposes a plan to repay debtors in three to five years.

Chapter 12 bankruptcy has a higher debt limits and is less expensive and less complex than the other chapters. However, it has a very limited application.

The history of Chapter 12 bankruptcy dates back to the 1898 bankruptcy act, but the chapter as we know it today wasn’t introduced until lawmakers passed the Family Farmer Bankruptcy Act of 1986.

5. Chapter 13 – Individual Debt Adjustment (aka “Super Discharge”)

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After Chapter 7, Chapter 13 bankruptcy is the most commonly filed chapter of bankruptcy.

Unlike Chapter 7, however, Chapter 13 bankruptcy does not involve liquidation. Rather the debtor keeps all of his or her property and makes payments on debts over the next three to five years.

To qualify for Chapter 13 bankruptcy, also known as reorganization bankruptcy, individuals must prove they have sufficient income to meet payment obligations.

Once the debtor completes the repayment plan, all remaining debts that are eligible for discharge will be wiped out — also known as a “super discharge.”

6. Chapter 15 – Ancillary and International Cases

Chapter 15 - Ancillary and International Cases

Chapter 15 bankruptcy was added to the bankruptcy code most recently in 2005 and is perhaps the most unique of all the chapters.

Chapter 15 bankruptcies address international bankruptcy issues by allowing proceedings for a foreign debtor or other related parties access to U.S. Bankruptcy Courts.

Chapter 15 cases are generally secondary to the primary bankruptcy proceedings, which usually take place in the home country of the foreigner. Once the Chapter 15 case is initiated, foreign representatives can seek further relief from the bankruptcy court by filing a full bankruptcy petition.

For more information about each chapter of bankruptcy, visit uscourts.gov.


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