Bankruptcy is when a person or organization cannot repay its debts to its creditors.
When a debtor cannot pay its creditors, bankruptcy provides a statutory procedure by which a debtor obtains financial relief.
When a debtor files for bankruptcy, the debtor's assets are either reorganized or liquidated, depending on under what chapter the debtor files for relief, for the benefit of the creditors.
Bankruptcy can be initiated by a debtor, voluntary bankruptcy, or by a creditor, involuntary bankruptcy.
There are six types of bankruptcy; chapter 7, chapter 9, chapter 11, chapter 12, chapter 13 and chapter 15.
Chapter 7 is the liquidation of debt.
This is a court supervised procedure in which a trustee takes over the assets of the debtor's estate and reduces any nonexempt property to cash to pay creditors.
There is usually no property in the estate that can be reduced to cash and this is known as a no-asset case.
Secured creditors are paid first followed by unsecured creditors if there are any funds left.
Unsecured creditors can only receive distributions from the estate if the creditor files proof of their claim in bankruptcy court.
Chapter 7 debtors receive a discharge of their debt almost immediately unless there are objections to the discharge.
A debtor can only qualify for chapter 7 under a means test but if the individual's income is in excess of a certain threshold then debtor cannot qualify for chapter 7 discharge.
Chapter 9, named the "Adjustment of Debts of a Municipality" allows municipalities (i.
e.
cities, towns, villages, counties, school districts, etc.
) to continue operating while paying creditors through a court-approved reorganization plan.
Chapter 11, entitled "Reorganization", is used most frequently by commercial enterprises who wish to continue operating their business.
Like Chapter 9, Chapter 11 allows the debtor to continue to function, maintain ownership of all assets, and work out a reorganization plan to pay off creditors.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the debtor has a 120-day timeframe in which to submit a reorganization/payment plan.
If the debtor fails to submit a plan within this period, creditors may submit their own plans.
Under Chapter 11, a debtor typically goes through a period of consolidation and comes out with a reduced debt and restructured business.
Chapter 12 is the adjustment of debts of a family farmer or a family fisherman with regular income.
This type of bankruptcy is similar to chapter 13 in which the debtor proposes a plan to repay their debts over a period of time (usually 3-5 years).
It also includes aspects of chapter 11 in which the family farmer or fisherman can continue to operate their business while their plan is being carried out.
Chapter 13 is the adjustment of debt for individuals with regular income.
This is generally preferable to chapter 7 because the debtor is allowed to keep all valuable assets.
The debtor proposes a plan to repay his or her creditors over a period of time (usually 3-5 years).
Chapter 13 is also the only option for individuals who do not qualify for chapter 7 under the means test.
The plan is based on the debtor's anticipated income over the life of the plan.
The debtors debts are discharged once the payments have been competed under the plan.
When the plan is in effect, the debtor is protected from lawsuits, garnishments and any other creditor action.
Also, more debts are eliminated under chapter 13 than under chapter 7.
Chapter 15 covers ancillary and cross border cases.
This chapter applies to debtors or property subject to the laws of the US and 1 or more foreign country.
There are also acts protecting different types of individuals.
There is the securities investor protection act that covers failing brokerage firms.
The purpose is to return investors securities and cash left with failed brokerages.
Another act is the service members civil relief act.
This act provides protection to members of the military.
It gives the court the ability to stay proceedings against military debtors.
When a debtor cannot pay its creditors, bankruptcy provides a statutory procedure by which a debtor obtains financial relief.
When a debtor files for bankruptcy, the debtor's assets are either reorganized or liquidated, depending on under what chapter the debtor files for relief, for the benefit of the creditors.
Bankruptcy can be initiated by a debtor, voluntary bankruptcy, or by a creditor, involuntary bankruptcy.
There are six types of bankruptcy; chapter 7, chapter 9, chapter 11, chapter 12, chapter 13 and chapter 15.
Chapter 7 is the liquidation of debt.
This is a court supervised procedure in which a trustee takes over the assets of the debtor's estate and reduces any nonexempt property to cash to pay creditors.
There is usually no property in the estate that can be reduced to cash and this is known as a no-asset case.
Secured creditors are paid first followed by unsecured creditors if there are any funds left.
Unsecured creditors can only receive distributions from the estate if the creditor files proof of their claim in bankruptcy court.
Chapter 7 debtors receive a discharge of their debt almost immediately unless there are objections to the discharge.
A debtor can only qualify for chapter 7 under a means test but if the individual's income is in excess of a certain threshold then debtor cannot qualify for chapter 7 discharge.
Chapter 9, named the "Adjustment of Debts of a Municipality" allows municipalities (i.
e.
cities, towns, villages, counties, school districts, etc.
) to continue operating while paying creditors through a court-approved reorganization plan.
Chapter 11, entitled "Reorganization", is used most frequently by commercial enterprises who wish to continue operating their business.
Like Chapter 9, Chapter 11 allows the debtor to continue to function, maintain ownership of all assets, and work out a reorganization plan to pay off creditors.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the debtor has a 120-day timeframe in which to submit a reorganization/payment plan.
If the debtor fails to submit a plan within this period, creditors may submit their own plans.
Under Chapter 11, a debtor typically goes through a period of consolidation and comes out with a reduced debt and restructured business.
Chapter 12 is the adjustment of debts of a family farmer or a family fisherman with regular income.
This type of bankruptcy is similar to chapter 13 in which the debtor proposes a plan to repay their debts over a period of time (usually 3-5 years).
It also includes aspects of chapter 11 in which the family farmer or fisherman can continue to operate their business while their plan is being carried out.
Chapter 13 is the adjustment of debt for individuals with regular income.
This is generally preferable to chapter 7 because the debtor is allowed to keep all valuable assets.
The debtor proposes a plan to repay his or her creditors over a period of time (usually 3-5 years).
Chapter 13 is also the only option for individuals who do not qualify for chapter 7 under the means test.
The plan is based on the debtor's anticipated income over the life of the plan.
The debtors debts are discharged once the payments have been competed under the plan.
When the plan is in effect, the debtor is protected from lawsuits, garnishments and any other creditor action.
Also, more debts are eliminated under chapter 13 than under chapter 7.
Chapter 15 covers ancillary and cross border cases.
This chapter applies to debtors or property subject to the laws of the US and 1 or more foreign country.
There are also acts protecting different types of individuals.
There is the securities investor protection act that covers failing brokerage firms.
The purpose is to return investors securities and cash left with failed brokerages.
Another act is the service members civil relief act.
This act provides protection to members of the military.
It gives the court the ability to stay proceedings against military debtors.