Bankruptcy Basics

The Law and its language

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.

You can go to the Glossary page in this site for an explanation of the terms used in bankruptcy.  When legal terms are used in this site, they are linked to the Glossary: you can click on the legal term and see a general definition of the term.

Bankruptcy chapters

There are four kinds of bankruptcy proceedings. They are referred to by the chapter of the federal Bankruptcy Code that describes them.

Chapter 7

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 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.

  Related topics:  Chapter 7 | Exemptions | Credit Cards | FAQ | Alternatives| Secured debts| Sale of assets  

Chapter 11 

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.

  Related topics:  Chapter 11Struggling Businesses| Creditor Rights

Chapter 12 

Chapter 12 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 13

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 10% 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. 

  Related topics: Compare 7 & 13 | Why Choose 13?Taxes | Is This Debt Secured? | Lien Stripping | How Chapter 13 works

Where to next?

You can read the Code itself. Or, (I knew you'd be interested in an alterative to that)  

consider whether you or your business need to file bankruptcy.   

examine which chapter suits you best by considering the kinds of debts you have   

explore the differences between the chapters and what happens in each chapter.   

look at bankruptcy from the creditor's point of view.   

  Get a book on bankruptcy

Or, you can continue exploring this site for a non technical overview of bankruptcy basics on the pages below.  

Continue bankruptcy tour 

FAQs ] Find a  lawyer ] Property ] Trustee ] Bankruptcy in CA ] Filing the case ] Exemptions ] Automatic stay ] Priorities ] Discharge ] Credit after bankruptcy ]

   Legal issues and bankruptcy questions are frequently complex and individual.  The information contained here is intended to be educational only:  it is not intended to be legal advice nor does it create an attorney client relationship between the viewer and the firm.  You should consult with a bankruptcy attorney licensed to practice in your state for advice about your particular situation.  See Law on the Internet   

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10/12/09