While the vast majority of bankruptcies are filed under Chapter 7 or Chapter 13, there are actually five types of bankruptcy that can be filed. Bankruptcies are described by “chapter” because the rights and responsibilities associated with each type of bankruptcy filing are found in a chapter of the Bankruptcy Code.
The Bankruptcy Code itself is found in Title 11 of the United States Code, which is the collection of laws passed by Congress and applicable across the country. There are ten chapters in Title 11, of which five are provisions affecting the administration of bankruptcy generally and five of which are “operational” chapters. Each of those operational chapters has specific criteria for eligibility and relief.
The most common bankruptcy is the Chapter 7 or liquidation bankruptcy. This is what people think of as “straight bankruptcy”. In a Chapter 7 bankruptcy, a trustee is appointed to administer the case and, if there are any non-exempt assets, they will be sold and the proceeds divided among the debtor’s creditors. In practice, because of state and federal exemption statutes, the vast majority of Chapter 7s filed are “no asset”, meaning the Debtors receive a discharge of their debts without losing any assets. Chapter 7 can also be filed by corporations, but they don’t get exemptions or (typically) a discharge.
Chapter 13s are wage earner reorganization plans. They can only be filed by individuals and typically last for three to five years. In a Chapter 13, the discharge comes at the end of the case after all the plan payments are made. Chapter 13 plans are extremely individualized and allow experienced attorneys to craft customized relief for debtors with complex financial situations. While practice varies by jurisdiction, in both Northern Kentucky and Cincinnati, where I practice, it is possible to file Chapter 13 plans with a low payout to unsecured creditors where a debtor’s budget shows the plan proposed is a good faith effort at repayment.
Chapter 11 bankruptcies are the ones that most often make headlines, as they tend to be business reorganization cases. Chrysler, GM and all manner of airlines have filed Chapter 11, some more successfully than others. Chapter 11s can also be filed by individuals or can be filed to liquidate businesses in an orderly fashion, but the reporting requirements and quarterly fees make them too expensive and cumbersome for most small businesses.
Very few Chapter 9 bankruptcies have ever been filed, since they may only be filed by municipalities. Orange County, California is probably the most famous example of a Chapter 9 filing. Chapter 12 bankruptcies are also uncommon. They must be filed by individuals who derive the bulk of their income from family farming or fishing. While we don’t get a lot of Chapter 12s in Northern Kentucky, I’m guessing there will be a few in Louisiana in response to the BP oil spill in the Gulf of Mexico. I may be the only person in the world who cares, but Chapter 12 is the only even numbered chapter in the Bankruptcy Code.
This post is only meant as a brief overview of the different types of bankruptcy. If you think you may need to file, an experienced bankruptcy attorney can explain the options available to you and what would be best suited to your financial needs.