Do you have questions about the different types of bankruptcies in the United States? Keep reading. In this article we will tell you what types of bankruptcy exist, which are the most common, and everything you need to know if you are considering filing for bankruptcy.
Believe it or not, filing for bankruptcy has helped millions of Americans alleviate their debt burden and get a fresh financial start. At Ortiz & Ortiz, we have a team of experienced NY bankruptcy lawyers to help you through this process.
The different types of bankruptcies in the United States in 2021
In the United States there are different types of bankruptcies available to individuals or companies. Do you have doubts about which one is the most appropriate for your case? Let’s start with the basics.
What is bankruptcy?
Filing for bankruptcy is a legal procedure that occurs when a person is unable to pay his or her bills and debts. Filing bankruptcy can help a person get rid of his or her debts or make a plan to repay them.
A bankruptcy case usually begins when the debtor files a petition with a bankruptcy court. This procedure is a right protected by federal law.
Who can file for bankruptcy?
According to information from the U.S. Federal Judiciary, a petition may be filed by an individual, by spouses together, or by a corporation or other entity.
Bankruptcy: A new beginning
Good news! Contrary to what one might commonly think about filing for bankruptcy, this procedure was meant to give debtors a fresh start.
The Supreme Court noted in 1934 that the purpose of bankruptcy law is positive:
“[It] gives the honest but unfortunate debtor … a new chance in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.”Supreme Court
6 different types of bankruptcies, which one is right for you?
The different types of bankruptcies depend on which entity wants to file for bankruptcy. Individuals and companies from different industries can access different types of bankruptcy filings.
In this article, we will delve into both personal bankruptcy and business bankruptcy. And we will explain the benefits and requirements of each of the following chapters of the federal law.
- Chapter 7: Liquidation. It is the most common alternative in the United States, with 70% of the total bankruptcies declared in 2020.
- Chapter 9: This is a very particular type of bankruptcy that allows municipalities with financial difficulties to file for Chapter 9 bankruptcy to protect themselves from creditors.
- Chapter 11: Business Reorganization. Filing for bankruptcy is an alternative that, if well utilized, allows businesses to reorganize and re-emerge. The concept that bankruptcy means the ruin of companies is not always true.
- Chapter 12: For farming and fishing families. This is a very specific case for this type of family dedicated to those productive items.
- Chapter 13: Reorganization. During the year 2020 there were 154,341 bankruptcy cases under this chapter. This represents 28% of the total cases.
- Chapter 15: This is a recent addition to the law, and was created especially for foreign creditors. Chapter 15 is useful to improve cooperation in international insolvencies.
Personal Bankruptcy Filings
If you believe that bankruptcy is a viable alternative to your debt situation, here we will review the available alternatives. For individuals, there are two types of bankruptcies. These are governed by Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
This case involves a court-ordered and court-supervised proceeding. The court appoints a trustee who takes over the unexempt assets of the debtor’s estate. It then reduces them to cash and makes distributions to creditors to pay off debts.
Let’s review the important points:
- Chapter 7 bankruptcy is known as liquidation bankruptcy because the court liquidates (sells) your assets to pay creditors and lenders.
- As soon as the court liquidates your assets and pays your creditors and lenders, it discharges any remaining balance.
- Asset liquidation sounds scary but the reality is that the court will not sell everything you own.
- Personal property, clothing, your home, retirement savings and others are exempt.
- With this type of bankruptcy you will be able to complete the process quickly and you will be able to start your financial life over.
- You should consider that filing for Chapter 7 bankruptcy costs $335.
Note: If you are interested in learning more about this personal bankruptcy alternative, you can review our detailed article on Chapter 7 Bankruptcy. In it you will find all the requirements, and the implications of this decision.
Chapter 13 Bankruptcy
Better known as a “wage earner’s plan”, Chapter 13 bankruptcy allows individuals with regular income to create a plan to repay all or part of their debts.
This alternative is about creating a court-ordered plan to repay your debts. It is for people with a certain level of income or assets.
- You as the debtor can propose a plan to pay your creditors in installments. You are granted a term that can be as long as 3 or 5 years.
- The final duration of this guarantee is determined by a court based on your income.
- During this repayment period, creditors cannot continue collection.
- The repayment plan is based on court-mandated budgets that follow IRS guidelines.
Filing for Chapter 13 bankruptcy is a great opportunity for debtors. If you decide to opt for this alternative, you should keep in mind:
- Penalties for non-payment are serious. Check to see if you can go to jail for debt in the United States.
- The requirements to qualify for Chapter 13 bankruptcy are quite strict. We recommend that you contact us so that our attorneys can advise you.
- Filing for Chapter 13 bankruptcy costs $274.
Note: In our article “Filing for bankruptcy Chapter 13” you will find a detailed guide with everything you need to know before filing for this bankruptcy alternative.
Differences Between Chapter 7 and Chapter 13
The main difference between Chapter 7 and Chapter 13 bankruptcy points to their method. The primary factor to consider is whether or not the person has the means to repay the debt. In other words, the key lies in the debtor’s income level.
A second important difference between the two alternatives is the length of the process:
- Chapter 7: Commonly, cases take between 3 and 6 months to complete.
- Chapter 13: Under this regime, the payment plan lasts 3 to 5 years. This depends on the debtor’s income. At the end of the process, most unsecured debt balances will be discharged.
Are you unsure which chapter best fits your situation? Check here for a comparison between Chapters 7 and 13.
Different types of Business Bankruptcies
You should know that business bankruptcies involve legal entities ranging from sole proprietorships and LLCs (limited liability corporations) to partnerships, professional associations and corporations.
In the case of the different types of business bankruptcies, Chapters 7 and 13 of Bankruptcy are variations on the theme of personal bankruptcy.
Chapter 13: Small Business Payment Plan
While this chapter is normally considered for individuals, Chapter 13 can be used for small business bankruptcy by sole proprietors because the sole proprietor and the individual are indistinguishable; in the eyes of the law, they exist as one.
- A small business that wishes to reorganize rather than liquidate may file for Chapter 13 bankruptcy.
- To do so, it must include a payment plan detailing how debts will be paid.
- And this plan will depend on how much you earn, how much is owed, and the value of the property you own.
Why not file for Chapter 7 liquidation bankruptcy and be done with the debt?
Chapter 13 protects personal property, such as a home, that would be subject to seizure in the event a sole proprietor filed Chapter 7.
Chapter 7: Liquidation
If your business is in a position of lacking a viable future and you are overwhelmed with obligations, you are a good candidate for a Chapter 7 business bankruptcy.
- Owners turn their business over to a court-appointed trustee for an orderly liquidation.
- No assets are exempt under this mode.
Chapter 11: Business Reorganization
This is an alternative that during the last year, in the midst of the coronavirus pandemic, increased considerably.
- Chapter 11 allows financially troubled companies to protect themselves from creditors while they reorganize their business operations, debts and assets.
- This allows companies to buy time, and hope that after a period of time business will pick up.
- In such a case, if all goes well, the business will reappear a few years later.
At other times Chapter 11 only buys time until a less encouraging outcome: The reorganization plan fails and liquidation occurs. During 2020 there were multiple Chapter 11 bankruptcy filings by large companies in the United States. In this article you can review examples of the 10 largest retail bankruptcies in the country during the pandemic.
Subchapter V of Chapter 11
On 2019, the U.S. Congress passed the Small Business Reorganization Act. This is Subchapter V of Chapter 11, which became effective at the beginning of 2020.
This new addition to the law seems to favor the petitioner’s side of the business bankruptcy. And it has the caveat that it only applies if the petitioner wants it to apply.
One example of this, is that Subchapter V does not require that a creditors’ committee be appointed nor does it require that creditors have to approve a court plan. Subchapter V is an alternative that should not be overlooked if you are thinking of filing for bankruptcy for your Small Business.
Do you think your company could apply for this category of bankruptcy? In our article “What is Chapter 11 Bankruptcy” you can find all the details about this type of bankruptcy.
Other types of bankruptcies
The above different types of bankruptcies are, by a large margin, the most common. Chapter 7, 13 and 11 bankruptcies constituted 99.9% of the bankruptcies filed in 2020 in the United States. However, there are exclusions in the Bankruptcy Code for debtors in special situations. Only 792 of the 544,463 cases filed in 2020 fall into these categories. Check below to see if your case may apply to one of them.
Chapter 12: For Farm and Fishing Families
Chapter 12, known as “Adjustment of debts of a family farmer or fisherman with regular annual income,” offers these workers the option of proposing a payment plan to regularize their debts. Such a plan can last from 3 to 5 years.
- This modality is similar in design and intent to Chapter 13. For example, in Chapter 12 there is also the figure of a trustee.
- Considering the seasonal nature of many small farming and fishing operations, Chapter 12 allows for greater flexibility in structuring periodic payments.
- One of the safeguards provided by Chapter 12 is that it allows a family farmer or fisherman to continue to operate the business while the payment plan is being carried out.
Family farmers or fishermen considering Chapter 12 should be aware of several changes that occurred in 2019 regarding the sale of assets.
Chapter 15: For foreign creditors
Finding yourself in a foreign country in a situation of extreme debt is something no one would want to be exposed to. However, bad financial decisions, or just plain bad business luck, can land anyone in that position. The courage and enthusiasm of entrepreneurship in a country like the United States, unfortunately, can also end badly.
- Chapter 15 is a fairly recent addition to the federal Bankruptcy Code.
- It was adopted to enhance cooperation in international insolvencies.
- Applications under this regime are rare.
- This type of bankruptcy is useful for those who have international businesses and therefore have debts in more than one country.
As explained by the U.S. Federal Judiciary, the purpose of Chapter 15, Ancillary and Other Cross-Border Cases, is to provide an effective mechanism for dealing with cross-border insolvency cases. This publication discusses the applicability of Chapter 15 when a debtor or its assets are subject to the laws of both the United States and one or more foreign countries.
Chapter 9: For municipalities
The latter is a particular case for local governments or municipalities. In particular situations, local governmental entities such as cities, townships, counties, school or taxing districts, etc. may find themselves in financial crisis. When these economic problems cannot be resolved through a combination of taxation, cuts in services and/or personnel, or floating bonds, bankruptcy protection may be sought.
Chapter 9, entitled “Adjustment of a municipality’s debts,” essentially provides for reorganization, much like that allowed under Chapter 11.
How to file for Bankruptcy?
We have already reviewed the different types of bankruptcies. If, after having studied them, you believe that your best alternative is to file for bankruptcy, you will need to begin a thorough and orderly process.
There are several steps in the entire bankruptcy filing process. To review each of these in detail, you can go to our article detailing the bankruptcy process in New York.
You should keep in mind 8 steps to follow during the process:
1. Credit Counseling
The law requires that in the six months prior to the bankruptcy filing, debtors must have credit counseling. Also post-bankruptcy, debtors must complete a course of financial management instruction.
2. Gathering Paperwork
This step is critical to the success of the process. While it can be tiring or tedious to complete, it is very important to do it thoroughly.
Gathering all of your financial history documents will make all the difference in getting your case approved in front of the court.
3. Means Test
Whether you pass the means test or not will help determine which chapter of bankruptcy you should file.
What is the Bankruptcy Means Test?
This economic means test is commonly known as the “means test”, and is a priority part of the bankruptcy application process.
- It consists of an analysis that determines your eligibility for bankruptcy benefits based on your monthly income.
- It is called the means test because it analyzes whether you have the means to repay your debts.
4. Filing for Bankruptcy
Once you have gathered all the information and have the documents to support your case, you will need to file the Bankruptcy Petition. Filing for bankruptcy can be done by you or your attorney. The petition consists of forms available at the courthouse, which must be completed with your information.
These forms are commonly called schedules. Through them, the court will ask you to describe your current financial status and recent financial transactions. Generally for the last two years. Be prepared for a thorough process. Schedules are usually 50 to 60 pages long.
Honesty about your financial situation is critical in this process. If the judge or your creditors feel or discover that you have withheld information or lied, the outcome of your petition will be at risk.
Finally, you will have to pay bankruptcy filing fees. Under Chapter 7, the cost will be $335. If you do not have the funds to pay this amount, you may be able to pay in installments. In the case of Chapter 13 bankruptcy, the filing fee is $274 and cannot be waived.
5. Automatic suspension of all debts
Once you file the paperwork with the bankruptcy court, the stay on all of your debts becomes effective. This is an automatic stay.
What does this stay mean? Creditors will no longer be able to contact you for collection efforts. They will also no longer be able to make any claims on your assets. This phase of the stay will stop any foreclosure proceedings.
6. Bankruptcy Trustee
By filing for bankruptcy, you are agreeing that the court will take legal control of your debts. The court will also take control of any property that has not been exempted.
The trustee process works as follows:
- You file for bankruptcy.
- The court assumes legal control of your debts.
- The court appoints a trustee for your case. The trustee’s role will be to see that creditors or lenders are paid as soon as possible.
- It will be the trustee’s job to review all the documentation you submitted and, in particular, the assets you own. Also to review any exemptions you wish to claim. It is the trustee also who may be able to contest items in your case.
7. 341 Meeting of Creditors
Within 4 to 8 weeks after you file for bankruptcy, the trustee will call the first meeting of creditors. You will also be required to attend this meeting. This meeting is known as the “341 Meeting” after the name of the corresponding section of the bankruptcy code.
Some points to keep in mind about the 341 Meeting are:
- Any objections to it are generally resolved in a negotiation between the debtor and the creditor or between the debtor’s attorney and the creditor.
- If no agreement or resolution is reached, a judge will intervene.
- This meeting lasts approximately five to twenty minutes. You will receive notice of the location of the meeting. Due to the COVID pandemic, all meetings have been conducted via telephone for the past year.
8. Plan Confirmation
If you filed a repayment plan under the Chapter 13 rules, you or your attorney must go to a hearing before a bankruptcy judge. At that hearing, the judge will confirm or deny the repayment plan. If the plan is approved and you comply with it, the remaining balance of debts (if any) will be eliminated at the end of your term.
What happens once you file for bankruptcy?
Filing for bankruptcy has multiple consequences. The main one is the opportunity for a fresh start. Filing for bankruptcy allows you to discharge debts and reorganize your personal and business financial debts.
However, there are multiple consequences of filing bankruptcy that you should be aware of before you begin the process.
Some common consequences of filing for bankruptcy are:
- Reduction of credit score.
- Difficulty in obtaining new credit or credit cards.
- Difficulty in obtaining a mortgage.
- Possibility of losing property such as your home and/or car. Check here to see if you can keep your car after filing bankruptcy.
- Possibility of losing your cash. In Chapter 13 this will not happen, but under Chapter 7, you may be able to shelter up to $10,000.
We recommend that you seek specific advice to understand the consequences of the type of bankruptcy that applies to your particular case.
Why hire the attorneys at Ortiz & Ortiz?
The different types of bankruptcies, and choosing which one is right for you or your business, is a complex decision. It is essential to carry out the process in an orderly manner and to make sure that all the steps are followed.
Our bankruptcy attorneys are ready to review your case and assist you in this process:
- They will evaluate your situation and analyze whether it is feasible to file for bankruptcy.
- If it is the best alternative, they will recommend which chapter of bankruptcy to file for.
- They will guide you through each of the steps involved in filing for bankruptcy.
- Our attorneys can accompany and represent you at any time and in any formal instance necessary.
For these and other legal and financial advisory services, contact us today – we look forward to hearing from you!