Title 11 of United States code provides important provisions for the bankruptcy law of the country. Almost all the laws, rules and regulations pertaining to the different types of bankruptcy are found in the Title 11, which in itself is divided into Chapters. It is a comprehensive, empowering document on the legal provisions of bankrupt and its types.
Let us take a quick look at the different definitions of bankruptcy. There are two common definitions which are accepted almost universally:
- Bankruptcy is a state of having financial and monetary insolvency, where the amount of liabilities of a person/debtor exceeds, his assets, and the debtor is not able to discharge the dues on date when the debt or a part of the debt becomes due.
- Bankruptcy is also a legal proceeding where the legal system goes through the process of paying off all the possible debts of the person by liquidating assets, and declaring the remaining unpaid debts as bad debts and closed accounts.
The title 11 is divided into several chapters, out of which 9 are of significance. The 6 types, are named after the chapters in which they have been specified and legislated. It must be noted that filing for bankruptcy can be either voluntary or can be mandated by the court, after it receives a petition from the creditors of the debtor.
Types of Bankruptcy in the United States
Here is a brief elaboration on the different types as prescribed by the Title 11.
Chapter 7 Bankruptcy: Chapter 7 bankruptcy is a basic type of bankruptcy, and the procedures and mechanisms that are congruent to Chapter 7 are followed throughout the world.
When a person files for the Chapter 7, all his/her assets are liquidated, and secured liabilities followed by unsecured ones are discharged and then declared closed. The debtor is permitted to avail some chapter 7 exemption assets. As per the rules, this bankruptcy record stays on the credit reports of people for 10 years.
Since this type was used as an escape from insolvency by people, a 'chapter 7 bankruptcy means test', is now used to ascertain authenticity in filing. Among the different types of bankruptcy for individuals, this is the most common one. However, it is also connoted to be a business bankruptcy.
Chapter 9 Bankruptcy: This kind of bankruptcy is for Municipalities and some specified government bodies and agencies. Among all the types of bankruptcies, this is toughest by the virtue of proceedings and is considered to be a heavy blow for the public administration in a certain area.
In this type, the municipality files for the bankruptcy (in some cases after extensive authorizations), following which the court puts a stay on the debts. These debts are then revised, bargained for, and then a court monitored process of scheduled repayment starts off.
The repayment schedule is often aided by state or Federal government funds. Orange County, California and Vallejo, California, are two very well-known Chapter 9 bankruptcy cases.
Chapter 11 Bankruptcy: The Chapter 11 bankruptcy, is the most common among businesses. This process is applicable for all the types of business organizations, right from large corporations to sole properties. In Chapter 11, the court and the debtor form extensive repayment schedule as per priority laws and rules.
The owner keeps on operating the business as a 'debtor in possession', till the debts are paid off. The automatic stay on debts and repayment planning is extended by the court, and the company keeps on operating under the immense jurisdiction of the court. In this type of bankruptcy for businesses, the control of the court often plays a crucial role.
Chapter 12 Bankruptcy: The chapter 12 is the bankruptcy for farmers and fishermen, and in some cases, people involved in animal husbandry.
This kind , though included in the personal bankruptcy, is more of a business bankruptcy and it works exactly like the chapter 11 bankruptcy. There are some critical advantages of this type, as it provides for a better debt ceiling, longer and more well planned and reorganized debt repayment.
Chapter 13 Bankruptcy: This is the next version of Chapter 7, the chapter 13 bankruptcy is like the Chapter 11 and involves reorganization and court mandated repayment plan to pay off all debtors.
Post the recession there are several new chapter 13 rules, factors and provisions such as credit counseling and guidance by the court have been inducted. This entire process is known as reorganization of debt and loans. The chapter 13 is applicable for individuals too.
Chapter 15 Bankruptcy: The chapter 15 is the most complex among all the bankruptcies for business, as it involves bankruptcy of a United States corporation operating in some other country. This chapter for bankruptcy is largely based upon the United Nations Commission on International Trade Law, and some other international laws.
It must be noted that there are some other types such as Federal bankruptcy or governmental bankruptcy, which are monitored strictly by the different Federal courts.