Types of Bankruptcy
There are four different types of bankruptcy are available to individuals—namely Chapters 7, 11, 12, and 13.
Posted here by Flint Bankruptcy Attorney Terry Bankert 235-1970. See Http://www.attorneybankert.com
There are two ways a bankruptcy may be started,voluntarily and involuntarily—and both forms of commencement invoke the automatic stay. See 11 USC 362(a) discussed in §17.11. In a voluntary bankruptcy, the debtor files the bankruptcy petition. In an involuntary bankruptcy, the statutory number of creditors file the bankruptcy against the debtor under 11 USC 303. An involuntary case against an individual may only be commenced under Chapters 7 or 11 of the Bankruptcy Code. Only a debtor may voluntarily file a case under Chapters 12 and 13.
A brief overview of the attributes and eligibility requirements of these four chapters is as follows:
Chapter 7—Liquidation: In this bankruptcy proceeding, the debtor turns over all nonexempt property to the Chapter 7 trustee, whose job it is to sell or liquidate the property and distribute the proceeds to creditors pro rata, usually in a one-time payment once all of the assets have been administered. The Chapter 7 trustee will also investigate the debtor’s financial affairs to determine the location of any nonexempt property (including causes of action) that can be turned into cash for distribution to creditors. The debtor will be released (i.e., discharged) from the unpaid portion of most types of debts. However, DSOs (defined in 11 USC 101(14A)) and debts owing to a spouse, former spouse, or child of the debtor and arising out of a divorce or separation are nondischargeable. See 11 USC 523(a)(5), (15). See §§17.16 and 17.17. The Chapter 7 trustee is always appointed by the U.S. trustee and is usually a member of a panel of trustees.
Chapter 11—Reorganization: The purpose of this bankruptcy proceeding is to allow the debtor a breathing spell from creditors and enable the debtor to reorganize his or her financial affairs. The debtor retains control of all of his or her property unless a Chapter 11 trustee is appointed for cause. Chapter 11 is the most expensive and complicated type of bankruptcy and can last for several years. The debtor proposes a plan of reorganization that is subject to the vote of the creditors. Individuals with debts exceeding the dollar limits in 11 USC 109(e) are eligible to file Chapter 11.
Chapter 12—Family farmer bankruptcy: This type of bankruptcy may be filed only voluntarily and only by a family farmer with regular annual income. This proceeding is similar to a Chapter 13, described below, but the debt limits in Chapter 13 do not apply to Chapter 12.
Chapter 13—Adjustment of debts: This type of bankruptcy may be filed only voluntarily and only by individuals with regular income (filing with or without a spouse) and with debts that fall within the statutory limits for secured debt and unsecured debt. Those debt limits are adjusted at three-year intervals pursuant to 11 USC 104. As of July 2010, the most recent adjustment was effective April 1, 2010, and it provides that only an individual with regular income and unsecured debts of less than $336,900 and secured debts of less than $1,010,650 is eligible to be a debtor under Chapter 13. Soon after a Chapter 13 case starts, the debtor must propose a plan but, unlike a Chapter 11, the creditors of a Chapter 13 debtor do not get the opportunity to vote on it. Instead, the bankruptcy court and the Chapter 13 trustee review the plan and must approve it as fitting within the strict requirements for a plan under Chapter 13. See 11 USC 1325. In the Chapter 13 plan, the debtor commits to pay the Chapter 13 trustee an appropriate part of his or her income or other property for a period of time (generally three to five years). A Chapter 13 trustee is appointed in each Chapter 13 case to distribute the debtor’s payments to the creditors in accordance with a confirmed Chapter 13 plan. Once the debtor has completed all payments due under a confirmed Chapter 13 plan, the debtor receives a broader discharge than individuals receive in a Chapter 7 liquidation. Priority debts must be paid in full, see 11 USC 1322(a)(2), and, pursuant to 11 USC 507(a)(1), a debt for a DSO is a priority unsecured claim. See §§17.16 and 17.17.
The main reason why an individual files bankruptcy is to try to secure a discharge from his or her debts. 11 USC 727 provides that all individual debtors are eligible to receive a discharge unless he or she has committed one of the “bad acts” described in 11 USC 727. However, even if a debtor is entitled to a discharge, 11 USC 523 provides that certain types of debt are nondischargeable. 11 USC 523 represents a legislative decision that some debts (including DSOs and other debts arising out of divorce or separation proceedings) must be paid even by a debtor who has otherwise been discharged of his or her other obligations.
As one of several incentives in the Bankruptcy Code to encourage debtors to elect Chapter 13 rather than Chapter 7 bankruptcy, Congress gives Chapter 13 debtors who fully comply with their plans a discharge of a wider variety of debts. See 11 USC 1328(a). Chapter 13 debtors who do not complete their plans (due to circumstances not of their own making) might get a hardship discharge under 11 USC 1328(b), which is the same discharge that is given to debtors in Chapters 7 or 11. See §17.14.
Michigan Family Law ch 17 (Hon. Marilyn J. Kelly et al eds, ICLE 7th ed 2011), at
(last updated 12/16/2011).