About Bankruptcy
Bankruptcy Terms
Bankruptcy law uses a lot of legalese no one who isn’t a bankruptcy attorney needs to know. Just so we’re speaking the same language, below are some definitions of terms I use on this site. After the definitions, there is a brief explanation of the various types of bankruptcy, and their place in US law.
Automatic Stay: The minute your bankruptcy petition is filed, virtually all of your creditors are prohibited by the Code from collecting from you. Everything from sending letters to foreclosing your mortgage is put on hold until the case is over.
Chapter 7: Basic, liquidation bankruptcy. Non-exempt assets are sold to pay creditors and the remaining debt is discharged.
Chapter 11: Reorganization bankruptcy. The debtor, usually a business, agrees to a payment plan for a few years.
Chapter 12: Special type of bankruptcy exclusively for family farmers and fisherfolk.
Chapter 13: Payment plan bankruptcy for individual (i.e., non-business) debtors.
Creditor: The person or business someone owes money to.
Debtor: A person or business who owes money. In bankruptcy, the person who is filing to have their debts discharged.
Discharge: The elimination of a debtor’s legal obligation to pay their debts. A fresh start.
Exempt/Exemption: Property or income that cannot be taken and sold by a creditor or bankruptcy trustee to pay a debt. Also exempt from garnishment or levy.
Garnish/Garnishment: If a creditor gets a judgment against you, they can ask your employer to garnish your wages, sending a portion of your money to the creditor to pay your debt.
Judgment: A court order, usually the final result of a case, that most often requires you to pay someone money.
Levy: Another way for a creditor to take your money after a negative judgment; they can have your bank hold a portion of the funds in your account for them, to pay your debt.
Petition: The legal document filed with the Bankruptcy Court to officially start a case.
Secured/Unsecured Debt: Property is secured if it has a lien or mortgage on it. The most common examples are home mortgages and car liens. Credit cards and medical debt are usually unsecured.
Trustee: The person appointed to represent the creditors in a bankruptcy case; makes sure each one gets a fair share of the available property.
The US Bankruptcy Code
In Article I of the US Constitution, Congress is empowered to make laws regulating bankruptcies. The current version of US bankruptcy law, the Bankruptcy Code, was enacted in 1978 (with various amendments since then) and is contained in Title 11 of the overall US Code. Chapters 1, 3, and 5 apply to every type of bankruptcy and are largely procedural. Chapters 7, 9, 11, 12, 13, and 15 contain specific rules for the various different types of bankruptcy.
Chapter 7: Liquidation
The simplest kind of bankruptcy is “liquidation,” located in Chapter 7 of Title 11. Liquidation means the debtor’s non-exempt property is sold and the money is distributed to the creditors. It sounds bad, but for the average individual it’s often the best option. First, it’s fast. Second, it’s more or less a one-time event; you don’t have to worry about a payment plan. Third, it’s less expensive because the filing and attorney’s fees are both lower. Best of all, most people have little or no non-exempt property. You will probably pay very little, and lose no property, to get rid of that huge mound of debt.
Chapter 13: Payment Plan
Unfortunately, not everyone qualifies for Chapter 7. If you make too much money, you might have to file a Chapter 13. In Chapter 13 you make monthly payments for either 3 or 5 years, based on your “disposable income.” At the end of the plan, any remaining debt is discharged. Even though it’s a much longer and usually more expensive process, it can be a good option for some. If you have a relatively large amount of non-exempt property to protect, a payment plan under Chapter 13 will usually let you do that.
Chapter 11: Reorganization
Chapter 11 was the original alternative to Chapter 7. Like Chapter 13, the debtor makes payments for a few years before the leftover debt is discharged. Unlike Chapter 13, 11 is available to businesses. When you hear about large corporations going into bankruptcy, they are usually filing Chapter 11. It’s also available to small businesses, though.* Because businesses tend to have more creditors and more complicated debt situations than the average individual, their bankruptcy cases are also usually more complex.
*Individuals can file Chapter 11, too, but usually Chapter 13 is a better option.
Chapter 12: Farms and Fishing
Family farms and family fishing businesses are often not organized like other businesses. When an individual or group of individuals owns a large number of assets needed to keep their business going, other forms of bankruptcy can make it hard to keep those assets and also pay their creditors. To help out struggling family farmers and fisherfolk, Congress passed Chapter 12, with special rules for such uniquely situated businesses.
Chapters 9 and 15: Cities and Foreign Bankruptcies
Chapter 9 cases are pretty rare. They let municipalities restructure their debts. If you aren’t a city or town, you don’t need to worry about it.
Chapter 15 is about how bankruptcies from other countries are handled in the US. It’s also not a problem for the average, individual filer who is likely to be reading this.