There are six types of Bankruptcy under current Federal law: Chapter 7, Chapter 9 , Chapter 11, Chapter 12, Chapter 13, and Chapter 15. (Also, there is a procedure informally called a “Chapter 20.” This is not an actual chapter under Federal rules; it is a rather a common name used by bankruptcy professionals to refer to those rare cases in which a debtor files a Chapter 7, then immediately after it is completed, files a Chapter 13.)
Most people in serious debt are candidates for either Chapter 7 or Chapter 13.
Here is a brief description of all six types provided for by Federal law, as well as some thoughts on when a so-called “Chapter 20” might be useful.
Chapter 7 Bankruptcy is often called “liquidation bankruptcy” or “straight bankruptcy.” An individual, a married couple, a partnership, a corporation, or an LLC may file under Chapter 7, which normally takes only about 4 ½ months from start to finish. You can completely cancel most kinds of debt outright, including all charge cards, medical bills, past due utility bills, collection agency accounts, personal loans, etc.. You are not required to make partial payments to creditors in a Chapter 7. It is a quick way to be given a fresh start.
The very day your case is filed, all creditors must stop all collection efforts, by Federal law. Harassing phone calls and letters must cease. If you are being sued, the lawsuit must stop immediately. If you have already been sued successfully and have a judgment against you, the creditor must stop all collection efforts; garnishing of your wages or bank accounts must stop, and often we can have money that was garnished returned to you.
If you have a car loan and it is current, and your equity in the car is not over $5,000, you can keep the car. If your mortgage payment is up to date, you can keep your house, as long as you keep up the payments and have no more than $21,500 equity, or $43,000 in equity for married couples. (If you are behind on your mortgage or car loan, or if you have more than the equity limits, you can probably file Chapter 13 bankruptcy and still keep your house and/or car.)
If your mortgage is behind, any efforts to foreclose must stop, including up until the morning of an auction sale. However, if you are behind in your mortgage payments and file Chapter 7, soon thereafter the mortgage lender will likely file a “Motion to Lift Stay” with the court, which means that after a court hearing, they are given permission by the court to go ahead and start advertising your house for foreclosure sale, unless your attorney can show why they should not. Since the hearing on the Motion is typically one or two months from when you filed bankruptcy, and since under Georgia law they must advertise any subsequent foreclosure sale for four weeks preceding the sale date, you generally have at least two or three months to get your mortgage caught up, if you can, and if your lender will work with you. (See our article Facing Foreclosure? elsewhere on this web site.)
If you have other houses or lands, these must be auctioned off by the bankruptcy trustee and the proceeds applied to your debts. Therefore, people with other real estate property who want to keep it typically file Chapter 13 bankruptcy instead of Chapter 7, as a 13 allows them to keep all their property, if they can make the payments after getting bankruptcy relief from their other debts.
For most people, most household items and personal possessions are exempt from seizure by the Trustee, and may be kept. Perhaps 95% of all people filing Chapter 7 do not have to give anything up, as there are reasonable amounts of your goods and household which may be exempted. However, if you have possessions which are above the exemption limits, such as very valuable antiques, expensive art, extravagant jewelry, etc., you may have to surrender them to the Trustee for auction. Also, in a Chapter 7 you are not allowed to keep large amounts of cash, stocks, bonds, and other investments. However, anything in a retirement IRA or 401(k), or in a bank account from Social Security or disability payments, is yours to keep.
Certain kinds of debt cannot be cancelled. The most common of these “non-dischargeable debts” are child support, alimony, student loans, IRS taxes under three years old, judgments in cases of wrongful death or personal injury due to drunk driving, government fines, or debt incurred through fraud. Also, if you are an employer, unpaid salaries and unpaid payroll deduction taxes are non-dischargeable, as are sales taxes collected but not yet paid to the State of Georgia by merchants. There are a few others, but these are among the most common.
If you have monthly income higher than the median income for your state, your numbers are crunched in a procedure known as the “means test,” which was designed to keep certain people with high income or high assets from being eligible to file under Chapter 7. If you are one of those who cannot file a 7 due to this test, you usually can file under Chapter 13 or Chapter 11. The filing fee payable to the Bankruptcy Court for a Chapter 7 is $335.00.
- Actual wholesale cash value of the vehicle, less the amount owed
- “Equity” means how much ownership interest you have in your house. To find out how much equity you have, take the present market value of your house and subtract the amount you still owe on the mortgage (usually called “Balance” on your mortgage statements). For example, if the purchase price of your house was $250,000, and the current market value is $180,000, and the amount still owed on your mortgage is $175,000, your equity would be $5,000 ($180,000 less $175,000).
Chapter 13 bankruptcy, sometimes called “wage-earner bankruptcy”or “personal reorganization,” requires that you must have some sort of regular income sufficient to cover your daily living expenses, not counting all your debt. Only individuals can file Chapter 13; corporations, LLCs, and partnerships cannot. A Chapter 13 case lasts for either three or five years, depending on your income.
The very day your Chapter 13 case is filed, all creditors must stop all collection efforts, by Federal law. Harassing phone calls and letters must cease. If you are being sued, the lawsuit must stop immediately. If you have already been sued successfully and have a judgment against you, the creditor must stop all collection efforts; garnishing of your wages or bank accounts must stop, and sometimes we can have money that was garnished from your pay returned to you.
If your mortgage is behind, any efforts to foreclose must stop, including up until the morning of a foreclose sale. You are allowed by the Court to catch up any overdue mortgage payments during the three or five years your bankruptcy lasts. For example, if your regular mortgage payment is $1,000 per month, and you are three payments ($3,000) behind, you can normally pay your regular mortgage payment of $1,000 plus $50 per month toward arrearages (total $1,050 per month) in a five-year plan. In addition, if your house is underwater (you owe more than it would sell for at the moment you file), any second mortgage can be declared “unsecured.” It is then possible for the second mortgage lien to be “stripped” (cancelled) by filing the proper motion with the Court.
Likewise, if your car loan is overdue, any efforts at repossession must stop at once, and you normally will be allowed plenty of time to pay off the arrearages. Also, if it has been more than 910 days since you purchased the car, you can force the lender to lower the principal balance on the loan to the actual cash value of the car, so you can make smaller payments. For example, if there is still $10,000 due on the car loan, and the actual cash value of the car is now $7,000, your attorney can strip $3,000 off the balance due, leaving only $7,000 still due to be paid. This is called a “cram-down,” for obvious reasons.
Chapter 13 filers do not have to surrender any of their personal possessions, and can own more than one piece of real estate. Your bankruptcy attorney prepares a “plan” for your case, which is due 15 days after the initial filing, in which you propose the terms under which you will make payments during the bankruptcy. First, your regular income is determined. Then, all daily living expenses are listed, with a reasonable allowance for all necessities, such as mortgage, car loans, gasoline, utilities, food, clothing, child support, IRS taxes not over three years old, etc.. (All interest and late fees on your unsecured debt are stopped by law.) The difference between your income and this living budget is considered your “disposable income.” You pay this amount monthly to the bankruptcy Trustee appointed by the Court, either by regular deductions taken from your wages (via an “Income Deduction Order”) or by mailing a check to the Trustee who divides it up among all your remaining creditors. He or she also applies it toward your legal fees (for your attorney and for the Trustee). It may be that your monthly payment pays everybody off in five years (a “100% plan”), or it may be that you only pay off pennies on the dollar, if you have a lot of debt and very little disposable income. Either way, the creditors are forced to accept whatever size payment is available. At the conclusion of the three or five year period, all remaining past due debt is forever permanently cancelled (“discharged”). In other words, you pay what you can during the plan, then you are totally free from all dischargeable debt (except for remaining secured loans such as your mortgage) at the end of your bankruptcy.
Your plan should have a reasonable budget which contains funds for major car repairs, tires, brakes, household major appliance or air conditioner failure, future medical expenses, etc.; some people with plans not providing for such expenses find later that they cannot comply with the Trustee’s strict enforcement of their plan, and end up dropping out of the plan before the time period is up, or converting to a Chapter 7. (The failure rate for people who try to file a Chapter 13 by themselves without using an attorney is virtually 100%. Considering that the great majority of the attorney’s fee can be deducted from the amount deemed payable to the creditors in most plans, trying to file without an attorney does not really save them any money, and is very unwise.) The filing fee payable to the Bankruptcy Court for a Chapter 13 is $310.00, whether you go through an attorney or not.
Chapter 13 bankruptcies may remain on your credit record for only seven years, although in some cases they remain for ten years; Chapter 7 bankruptcies remain on your credit record for ten years. (The amount a bankruptcy lowers your credit score does not last for seven or ten years, however; it becomes lower every quarter. See our article entitled Your Credit Score After Bankruptcy elsewhere on this web site.) Creditors and bankruptcy court trustees generally prefer Chapter 13 filers to Chapter 7 filers, since they make at least partial repayment on their debt, whereas Chapter 7 filers just walk away from it.
If a person owes more than $394,725 in unsecured debt (such as credit cards), or more than $1,184,200 in secured debt (such as mortgages), they do not qualify for Chapter 13 bankruptcy, and must file Chapter 11 if they want bankruptcy protection from the courts.
THE FOUR LESS COMMON TYPES OF BANKRUPTCY
Chapter 9 is for cities and other municipalities. It is sometimes the only way out when there is serious utilities mismanagement, or when pusillanimous or just plain stupid politicians fritter away the people’s money on outrageously expensive pension plans for government workers to satisfy vote-buying political pressure groups, etc. “I’ll be long gone when it comes due, anyway!”
When a governmental body goes bankrupt under Chapter 9, they set up a reorganization plan. Bond issues and other debts can be lengthened or refinanced, with both principal and interest subject to being reduced. Union contracts and pensions can be renegotiated, changed, or thrown out. The goal is to let the city get back on a sound financial footing.
Unlike some other forms of bankruptcy, there is no requirement that the assets of the government body be sold off to satisfy debts.
Chapter 11 bankruptcy is primarily for reorganizing the financial affairs of companies, to enable a business to continue to operate and hopefully become profitable when it finds that its debts are more than its income. It can be used for large and small corporations, partnerships, and LLCs. Chapter 11 can also be used by some individuals. If a person owes more than $394,725 in unsecured debt (such as credit cards), or more than $1,184,200.00 in secured debt (such as mortgages), they do not qualify for Chapter 13 bankruptcy, and must file Chapter 11 if they want bankruptcy protection from the courts.
Chapter 11 is much more complicated and expensive than Chapter 7 or Chapter 13. Just the filing fees alone to start a new Chapter 11 proceeding is $1,717.00; and a typical cost for legal fees might easily be $10,000 or $20,000 the first year alone. There are a lot of reports required for taxes, insurance, operations, and bank accounts. On the other hand, you must file a reorganization plan within 120 days of filing, whereas you only have 15 days to do so when filing a Chapter 13. And the plan need not be limited to a maximum of five years, as in a Chapter 13, if bankruptcy protection is needed for a longer time period. With Chapter 11 you can get out of any leases for offices or equipment you do not really need, and you can force secured creditors (such as mortgage holders of an office building or factory you are buying, or loans with which you bought vehicles your business needs) to re-write the loans down to the actual cash value of the items being paid for, possibly with other improvements in the terms.
Chapter 11 cases opened for small corporations or individuals fail very often. In fact, it is the opinion of many good attorneys that most small-business or personal Chapter 11 cases fail. Often the corporation or individual is not able to keep the company running without further losses, and so when the reorganization plan fails, the Court either dismisses the case or forcibly converts it to a Chapter 7 case. The key to avoiding failure is careful planning before filing. The cases most likely to fail are the ones filed on an emergency basis, with inadequate accounting or planning as to the company’s true prospects for success.
The main purpose of Chapter 11 is to allow time to reorganize the business to make it successful (or, in the alternative, to allow for orderly, fair liquidation). If the business is not making money now, why not? Is there any evidence or reason this is likely to change? Will layoffs or trimming excess expenses enable the core business to succeed? Was the difficulty due to embezzlement or mismanagement by an employee or manager who is now gone from the company? If filing Chapter 11 will allow time and means to make the business profitable in the future, and stop losing money, then the Chapter 11 can succeed. Filing just to stall creditors may only delay inevitable business failure. People should not rush into a Chapter 11 on an emergency basis, without careful planning; that may only be a waste of time and a lot of money. First make sure you have accurate, complete accounting, and up-to-date tax returns so you and your CPA and a good bankruptcy lawyer can determine the true position of your company and the advisability of filing Chapter 11.
Sometimes a smaller corporation has the choice of filing under either Chapter 7 or Chapter 11; or an individual may have the choice of filing under Chapter 7, Chapter 11, or Chapter 13. When such an option occurs, occasionally certain law firms like to steer their clients towards Chapter 11 when a much cheaper Chapter 13 or Chapter 7 would have been much more logical, because under Chapter 11, the law firm stands to make tremendously higher fees– perhaps from four to thirty times as much! For a small company, just the legal fees alone can contribute to failure in a Chapter 11. Such firms sometimes advise their clients to file under Chapter 11 knowing that it is unlikely to succeed, and that the case will likely be dismissed or converted to a Chapter 7 by the court, after the law firm has made a lot of money from the client.
Fortunately, most law firms would not do such a thing, but sometimes, this word to the wise may save you a lot of unnecessary expense and trouble. And a law firm is likely giving you good advice to file Chapter 11 if you are an individual over the debt limits for a Chapter 13, or if it is a case where Chapter 11 is the only way possible to keep a business going which has a good chance of success. Situations vary; be sure to see a qualified attorney for advice in your particular case.
Chapter 12 bankruptcy provides protections for family farmers and other similar occupations involving crops or animals. Chapter 12’s can be filed for dairy farms, tree farms, cattle ranches, horse farms, fishermen, etc. We have even heard of them being filed for butterfly farms and llama ranches! If you can prove that at least half of your income for the last year (or two) is from farming or fishing, that at least half your debt (not counting your house mortgage) is from farming or fishing, and that you have regular income, you can probably file a Chapter 12.
First enacted by Congress in 1986, the purpose of Chapter 12 is to allow distressed farming families to get back on their feet, keep their farms, and reorganize their finances, lengthening the payback period for their loans.
Chapter 12 cases give some excellent advantages. Farmers can force creditors to modify their mortgages, and any other secured debt (equipment loans, etc.), modifying them to actual market value, lowering the interest to current market rates, and lengthening the term of the loans. (Payments are made through the trustee the first three to five years; then the creditor must honor the modified loan however long it lasts.) Also, you may receive authority to cancel an unfavorable gas or oil lease; and special income tax breaks apply if you end up selling your farm.
Some attorneys say that a Chapter 12 is like a Chapter 13 on steroids, probably thinking mainly of the generous loan provisions. Other attorneys liken Chapter 12 to a cross between a Chapter 11 and a Chapter 13, with conditions far more favorable for farmers, and much less expense and legal work than a Chapter 11. Most agree that of all six types of bankruptcy, Chapter 12 is the most debtor-friendly and helpful.
The debt limits are much greater under Chapter 12 than under Chapters 7 or 13. For example, farmers filing Chapter 12s may owe well over three million dollars, on any kind of debt, whereas Chapter 13 filers are limited to $394,725 in unsecured debt (such as credit cards), or no more than $1,184,200 in secured debt (such as mortgages).
Chapter 15 Bankruptcy is for insolvent companies (or some individuals) with assets and/or operations located in two or more countries.
In the past, the attitude of most countries toward cross-border insolvency was often to attempt to grab all assets of the debtor, wherever located, and then give repayment preference to the home country creditors. In a well-intentioned effort to promote more equitable policies, the United Nations Commission on International Trade Law (“UNCITRAL”) promulgated a Model Law on Cross-Border Insolvency in 1997. In 2005, the U.S. Congress established Chapter 15 Bankruptcy as the U.S. version of the UNCITRAL law.
Various versions of the UNCITRAL Model Law have been enacted by Canada, Mexico, Japan and other countries; adoption is pending in the United Kingdom, Australia, and other countries.
Chapter 15 cases can be complex and costly. Just the filing fee alone (without any attorney fees) is $1,717.00. Application of the laws can be affected significantly by the jurisdictions involved, and there is much turbulence and litigation in many Chapter 15 cases. Few American bankruptcy lawyers have the resources to handle such cases, and those who do are usually very expensive.
There are five primary objectives for Chapter 15 bankruptcy cases specified in 11 U.S.C. § 1501:
- To promote cooperation between the United States courts and parties in interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases;
- To establish greater legal certainty for trade and investment;
- To provide for the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor;
- To afford protection and maximization of the value of the debtor’s assets; and
- To facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
There is no such thing as a “Chapter 20 bankruptcy” in Federal law. However, in certain unusual cases, it may be advantageous for some people to file a Chapter 7 bankruptcy, then file a Chapter 13 immediately after the 7 is complete, if that is allowed in the bankruptcy district where they live. (You must meet all of the usual conditions to file a 7 and a 13.) This is informally called a “Chapter 20” by some attorneys and trustees (7 + 13 = 20). Filing a 13 will not lead to a discharge of debts if it is filed less than four years after the 7 (in which debts were discharged) is over, but there could be other reasons to file a followup Chapter 13.
For example, it may be you have very large non-dischargeable debts, such as IRS tax debt or student loans. Filing a 7 first could get rid of a large amount of dischargeable debt, such as credit cards, medical bills, or lawsuits, or wage garnishment due to adverse court judgments against you. Then, with that debt out of the way, you could use the protection of the Chapter 13 to make an affordable payment on your non-dischargeable debts without collectors harassing you.
There is also the possibility of someone filing a Chapter 13 and receiving a discharge, and then having an unexpected credit crisis (such as huge medical bills from a stroke or accident). In a case like this, you are allowed to file a followup Chapter 7 and receive a discharge if you paid off all creditors 100% in your Chapter 13 (and sometimes, depending on the circumstances, if you paid off at least 70% of all claims, and “the plan was proposed in good faith and was your best effort.”) If neither of these was the case with your discharged Chapter 13, no discharge can be allowed for the followup Chapter 7 until at least six years have passed.