Bankruptcy Basics

Bankruptcy is our Constitutional Right, and Federal Law has evolved since the original US Constitution to the creation of the U.S. Bankruptcy Code that we have today.  Our Bankruptcy Code provides for the following types of bankruptcy filings:

Chapter 7 — Liquidation — provides for the liquidation of a debtor’s non-exempt assets by a trustee to raise cash to pay off creditors’ claims. Companies, as well as individuals, can file for chapter 7. Spouses can file a joint-case and pay only one filing fee. The 2005 Amendments to the Bankruptcy Code have increased the complexity of individual consumer chapter 7 cases.  Most Chapter 7 cases are administered as “no asset” cases due to the liberal exemptions provided to residents of California.  What this means is that people qualifying for Chapter 7 bankruptcy can own assets without the fear of losing them when the Chapter 7 case is filed.

Chapter 9 – Municipal Bankruptcy – protects financially-distressed municipalities from creditors while the municipality creates and negotiates plans to adjust its debts.

Chapter 11 – Reorganization – provides for reorganization of a debtor under a reorganization plan that is voted on by the debtor’s creditors. However, it is possible for a business debtor to liquidate its assets in chapter 11 under a “liquidating plan.” Companies as well as individuals can file for chapter 11. However, chapter 11 is typically not suitable for individual or consumer debtors unless they have a high net worth or high income.

Chapter 12 – Family Farmer or Fisherman Debt Adjustment – provides for adjustment of debts of a family farmer or fisherman with regular income and subject to certain debt caps.

Chapter 13 – Wage Earner Debt Adjustment – provides for adjustment of debts of an individual with regular income (spouses can file a joint-case). Total unsecured debt cannot exceed $419,275 and secured debt cannot exceed $1,257,850.

Chapter 15 – Ancillary and Other Cross-Border Case – provides a mechanism for dealing with foreign bankruptcy cases where the debtor has assets or creditors in the U.S.