Bankruptcy: What Is It And What Do The Chapters Mean?
Bankruptcy in the United States is a constitutionally (Article 1 Section 8, Clause 4 to be exact) approved way for business entities and individuals to settle big amounts of debt. Congress is in charge of making the bankruptcy laws. The most recent change was an amendment to existing laws through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. For other laws relevant to bankruptcy, turn to the United States Code.
Bankruptcy cases are filed in United States Bankruptcy Court, so federal law will govern the procedure in bankruptcy cases. But state laws are also applied when property rights are being determined. One example is that rules that protect property from creditors (the people who you owe money to) will come from state law.
Bankruptcy comes in a couple of forms, or Chapters. Title 11 of the United States code has nine chapters. Six of these will need you to file a petition. The remaining three come with rules to govern these petitions.
Chapter Seven is the bankruptcy that most people will file for. This involves a trustee who is appointed to collect the property of the debtor that is not exempt. Then the trustee will go ahead and sell it, and distribute the proceeds to the creditors. Every state lets debtors keep essential property, so most Chapter 7 cases will let the debtor keep all of their property.
A Chapter Nine bankruptcy is only available to municipalities. It’s a form of reorganization, not liquidation. One notorious example of this was when Orange County, California filed. Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is more complicated. It involves letting the debtor keep some, or all of their property, and reorganization. They will use future earnings to pay off creditors. People generally file Chapter 7 or Chapter 13. Sometimes an individual will file for Chapter 11, but this is rare. Chapter 12 is similar to Chapter 13, but is only available to “family farmers” and “family fisherman” in some situations. Generally, chapter 12 has is more generous for debtors than a similar Chapter 13 case.
In 2005, Chapter 15 was tacked on to the list. It deals with foreign companies with U.S. Debts.
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