Unit
- Chapter 7 liquidation: The most common form of bankruptcy for individuals and businesses seeking a fresh start. Assets are sold by a trustee to pay creditors, and remaining eligible debts are discharged. Eligibility requires passing a means test that compares income to the state median.
- Chapter 11 reorganization: Primarily used by businesses to restructure debts while continuing operations. The debtor remains in possession and proposes a plan of reorganization approved by creditors and the court. No means test applies, but the process is complex and costly.
- Chapter 13 adjustment of debts: Available only to individuals with regular income who have unsecured debts below a statutory cap (currently $465,275) and secured debts below $1,395,875. Debtors propose a three-to-five-year repayment plan using future earnings.
- Small business debtor provisions: Chapter 11 includes a streamlined process for entities with less than $2.7 million in debt, with shorter deadlines and reduced disclosure requirements to accelerate reorganization.
- Chapter 12 family farmer or fisherman: A specialized chapter for family farmers and fishermen with regular annual income. It offers flexible repayment terms similar to Chapter 13 but tailored to agricultural and fishing cycles.
- Chapter 9 municipality bankruptcy: Available to political subdivisions such as cities, towns, and school districts. It allows them to restructure debts under state law authorization while maintaining essential services.
- Eligibility criteria summary: Each chapter imposes distinct eligibility thresholds based on debt type, income level, and entity status. Filing under the wrong chapter can lead to dismissal or conversion, making accurate classification critical at intake.
- Strategic selection considerations: Practitioners must evaluate the client's financial goals, asset composition, income stability, and the nature of debts. For example, a solvent business facing a temporary cash crunch may choose Chapter 11 over liquidation to preserve going-concern value.
- Automatic stay provisions: Upon filing any bankruptcy chapter, an automatic stay immediately stops most collection actions, including lawsuits, wage garnishments, and foreclosure proceedings. Creditors must seek court permission to continue. The stay provides breathing room for debtors to reorganize or liquidate assets without external pressure.
- Discharge and exceptions: Chapter 7 grants a discharge of most unsecured debts, but certain obligations like student loans, recent taxes, child support, and fraud-based debts are non-dischargeable. Chapter 13 offers a broader discharge after completion of the repayment plan, including some debts that cannot be discharged in Chapter 7.
- Role of the trustee: In Chapter 7 and Chapter 13, a trustee is appointed to oversee the case. The Chapter 7 trustee collects and liquidates non-exempt assets and distributes proceeds to creditors. The Chapter 13 trustee reviews the repayment plan, collects payments from the debtor, and distributes them to creditors according to the confirmed plan.
Governance Requirement
Requirement: U.S. Bankruptcy Code Title 11, sections 109, 301, 302, 303, and 304 define eligibility for each chapter. Additionally, the Federal Rules of Bankruptcy Procedure (FRBP) govern procedural aspects such as filing deadlines and notice requirements. Practitioners must ensure compliance with these statutory provisions to avoid dismissal or sanctions.
Compliance description and implications: Failure to verify eligibility before filing may result in immediate case dismissal, wasting client resources and court time. For example, filing Chapter 13 with debts exceeding the statutory limits requires the court to either dismiss the case or convert it to Chapter 7, potentially harming the debtor's ability to protect assets.
Quick Revision
- Bankruptcy chapters are distinguished by purpose: liquidation (Chapter 7), reorganization (Chapter 11), and debt adjustment (Chapter 13).
- Eligibility for Chapter 7 requires a means test; Chapter 13 has debt caps.
- Small business debtors benefit from streamlined Chapter 11 procedures.
- Choosing the wrong chapter can lead to dismissal or conversion, so careful analysis is essential.