In the United States, there are various “chapters” of bankruptcy. Each having its own implications makes it vital for those filing for bankruptcy to understand them, and how that influences the legal representation they will seek. This post will look at different bankruptcy chapters and how bankruptcy lawyers can help.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy also goes by the term “liquidation bankruptcy,” and is the most common chapter that people file for in the U.S. It’s also the most basic form, and it describes what most people think bankruptcy is.
Bankruptcy lawyers recommend chapter 7 to help individuals relieve themselves of debts and to sell off certain assets so that the debtor can reset their finances. Also, a chapter 7 bankruptcy doesn’t involve a repayment plan, giving the debtor a “clean slate.” The debtor(s) can be an individual, a partnership, or a business entity.
Chapter 9 Bankruptcy
Chapter 9 bankruptcy applies not to an individual but to municipalities — and it’s rare. If you’ve ever heard of a city, town, or county filing for bankruptcy, they likely filed for a chapter 9 bankruptcy.
Famous examples of municipalities filing for chapter 9 include Jefferson County, AL (2010), San Bernadino, CA (2012), and Detroit, MI (2013). Economic collapse and insurmountable debts often lead to municipal bankruptcy filings.
Bankruptcy lawyers in these cases offer legal representation by guiding municipal officials who have to deal with creditors directly.
Chapter 11 Bankruptcy
A chapter 11 bankruptcy can pertain to both individuals and businesses. It’s similar to chapter 7 bankruptcy. However, the debtor still retains control of their business and doesn’t have to sell off their assets. Bankruptcy lawyers will recommend a chapter 11 for business owners who still have a hope of salvaging their operations.
Business owners may need legal representation for offsetting debts. However, the owners themselves will try to reorganize their finances by refinancing interest rates, consolidating debts and negotiating payments to parties they owe funds. Ultimately, the business or individual will work to emerge with better financial health.
Chapter 12 Bankruptcy
For chapter 12 filings, bankruptcy lawyers offer legal representation for “family farmers” and “family fishermen” enduring financial hardship. As their names imply, this type of bankruptcy serves non-commercial operators of fishing and farming businesses. Those who qualify for a chapter 12 bankruptcy must repay their debts to creditors within a 3-5 year period.
Bankruptcy lawyers will often recommend it to fishing/farming families instead of chapter 11 bankruptcy. They do so because chapter 12 bankruptcy involves a more simplified process, and it costs less than a chapter 11 one does. That makes the chapter 12 bankruptcy ideal for families already struggling financially. However, it resembles chapter 11 bankruptcy in the sense that it too allows families to reorganize their finances.
Chapter 13 Bankruptcy
A chapter 13 bankruptcy is essentially what chapter 7 bankruptcy is minus the selling off of assets. In other words, a person filing for a chapter 13 bankruptcy will get assistance to repay some (or all) of their debts and avoid the foreclosure of their home (which may happen in some chapter 7 filings).
Bankruptcy lawyers will recommend filing for chapter 13 when the individual has a stable income that may allow them to pay off debts more quickly. However, chapter 13 candidates must pay their debts off in no longer than five years.
Chapter 15 Bankruptcy
Chapter 15 bankruptcy is the newest edition to the bankruptcy book, which the U.S. government introduced in 2005. The United States Courts define chapter 15 bankruptcy as a means to:
“… provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country.”
For example, Virgin Atlantic filed for a chapter 15 bankruptcy in 2020 due to COVID-19’s economic effects. The airline carrier is based in London, U.K. but did so in New York. Since Virgin Atlantic operates in multiple countries (in this case, the U.K. and the U.S.), they were eligible for chapter 15 bankruptcy protection.
For this chapter, bankruptcy lawyers usually offer legal representation for businesses since they’re more likely to have international components. The goal of a chapter 15 bankruptcy is to ensure that the United States and foreign courts cooperate and help protect the business (and its employees) while making financial adjustments.
Legal Representation for Bankruptcy: Which Chapter Should You Open?
If you’re looking for representation for bankruptcy, you might feel unsure of which chapter best fits your situation. The answer will be clear-cut in some cases, while other scenarios may qualify you for more than one chapter. Factors such as your income and the extent of your debt may determine what type of chapter bankruptcy lawyers recommend.
You’ll likely never need to deal with chapter 9 bankruptcy — unless you work in government and represent a municipality. Even then, it rarely happens. Chapter 15 bankruptcies tend to get filed for international business claims. Chapter 12 bankruptcies may only come into play if you work in the agriculture or fishing sectors. That leaves the remaining three chapters — 7, 11, and 13 as the typical ones for individuals.
Common Chapters That Bankruptcy Lawyers Represent
- Chapter 7 – This chapter will apply to you depending on your income. Bankruptcy lawyers will offer legal representation for this chapter if your income is less than the median income for your state.
- Chapter 11 – This chapter allows debtors to create and follow a payment plan. Typically, it has business applications. Bankruptcy lawyers may recommend this to individuals who earn enough income and have a viable plan to pay back their debts.
- Chapter 13 – If your income is stable (and higher than your state’s median income), a bankruptcy lawyer may recommend you file for this chapter. It stipulates that you make enough money to repay some debts but not enough to pay all you owe. That will result in a repayment plan with a 5-year maximum, which must get approved by the Trustee. Also, you must pay some debts such as loans and taxes in full. However, others (such as medical and credit card debts) may only require partial payment.
This is a general framework. Bankruptcy lawyers will consider many other factors to determine what chapter is ideal for you. As part of their legal representation, they must recommend a chapter that helps you reset your finances best while minimizing the long-term consequences of bankruptcy.
Bankruptcy Lawyers Help You Start Fresh Financially
Filing for bankruptcy carries a certain degree of stigma, and for many, it symbolizes a sense of failure and despair. However, although never ideal, filing for bankruptcy can lift a weight off your shoulders and help you slowly rebuild your finances.
The role of bankruptcy lawyers is to help you file a sensible chapter for your financial situation, enabling you to avoid too much penalization (i.e. credit profile damage). Also, they provide legal representation in clarifying paperwork and advocating on your behalf to qualify for a chapter.