What is bankruptcy?
Bankruptcy in the United States seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they can't pay, and that creditors get paid from whatever assets the debtor does not need to live going forward. Bankruptcy is governed by the federal law found in Title 11 of the United States Code. As federal law, it supercedes any conflicting state law by reason of the Supremacy Clause of the Constitution. With the exception of exemptions, it is the same from state to state.
What types of bankruptcy are there?
There are four kinds of bankruptcy proceedings. They are referred to by the chapter of the federal Bankruptcy Code that describes them. Chapter 7 - The Atom-Bomb Bankruptcy (most common but not always the best) Chapter 13 - Repayment Plan Chapter 11 - Business Bankruptcy or Over-Limits for Chapter 13 (most expensive) - most large companies reorganize under Chapter 11 Chapter 12 - Farmers bankruptcy is a simplified reorganization for family farmers, modeled after Chapter 13, where the debtor retains his property and pays creditors out of future income.
Chapter 7 - The Atom Bomb
Chapter 7 is the most common form of bankruptcy. It is a liquidation proceeding in which the debtor's non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities among creditors established in the Code. Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors typically get a discharge within 4-6 months of filing the case. If there are assets which are not exempt, the trustee takes control of those assets, sells them and pays creditors as much as the proceeds permit. Any wages the debtor earns after the case is begun are the debtor's; the creditors have no claim on those earnings.
Chapter 11 - Business or Over-Limit Individual Payment Plan Reorganization
Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. Individuals, especially those whose debts exceed the limits of Chapter 13, may file Chapter 11. In Chapter 11, the debtor usually remains in possession of his assets and continues to operate any business, subject to the oversight of the court and the creditors committee. The debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization.
Chapter 13 - Repayment Plan
Chapter 13 is a repayment plan for individuals with regular income and unsecured debt less than $336,900 and secured debt less than $1,010,650. The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over time (3-5 years). Repayment in Chapter 13 can range from 1% to 100% depending on the debtor's income and the make up of the debt. Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts. In certain circumstances, debtors can reduce the balance of loans on vehicles or discharge second mortgages or home equity lines of credit. These types of discharges can be complex, though, and typically require the assistance of an attorney.