Reference - Bankruptcy Chapters
Explained
Chapter 7
The potential chapter 7 debtor should understand that a straight
bankruptcy case does not involve the filing of a plan of repayment as in
chapter 13, but rather envisions the bankruptcy trustee's gathering and
sale of the debtor's nonexempt assets, from which holders of claims
(creditors) will receive distributions in accordance with the provisions
of the Bankruptcy Code. Part of the debtor's property may be subject to
liens and mortgages that pledge the property to other creditors. In
addition, under chapter 7, the individual debtor is permitted to retain
certain "exempt" property. The debtor's remaining assets are liquidated
by a trustee. Accordingly, potential debtors should realize that the
filing of a petition under chapter 7 may result in the loss of property.
In order to qualify for relief under chapter 7 of the Bankruptcy
Code, the debtor must be an individual, a partnership, or a corporation.
11 U.S.C. §§ 109(b); 101(41). Relief is available under chapter 7
irrespective of the amount of the debtor's debts or whether the debtor
is solvent or insolvent. An individual cannot file under chapter 7 or
any other chapter, however, if during the preceding 180 days a prior
bankruptcy petition was dismissed due to the debtor's willful failure to
appear before the court or comply with orders of the court or the debtor
voluntarily dismissed the previous case after creditors sought relief
from the bankruptcy court to recover property upon which they hold
liens. 11 U.S.C. §§ 109(g), 362(d) and (e).
One of the primary purposes of bankruptcy is to discharge certain
debts to give an honest individual debtor a "fresh start." The discharge
has the effect of extinguishing the debtor's personal liability on
dischargeable debts. In a chapter 7 case, however, a discharge is
available to individual debtors only, not to partnerships or
corporations. 11 U.S.C. § 727(a)(1). Although the filing of an
individual chapter 7 petition usually results in a discharge of debts,
an individual's right to a discharge is not absolute, and some types of
debts are not discharged. Moreover, a bankruptcy discharge does not
extinguish a lien on property.
Chapter 11
A case filed under chapter 11 of the United States Bankruptcy Code is
frequently referred to as a "reorganization" bankruptcy.
How Chapter 11 Works
A bankruptcy case commences when a bankruptcy petition is filed with the
bankruptcy court. Fed. R. Bankr. P. 1002. A petition may be a voluntary
petition, which is filed by the debtor, or it may be an involuntary
petition, which is filed by creditors that meet certain requirements. 11
U.S.C. §§ 301, 303. A voluntary petition should adhere to the format of
Form 1 of the Official Forms prescribed by the Judicial Conference of
the United States. The Official Forms may be purchased at legal
stationery stores or download from the internet at www.uscourts.gov. The
voluntary petition will include standard information concerning the
debtor's name(s), social security number or tax identification number,
residence, location of principal assets (if a business), the debtor's
plan or intention to file a plan, and a request for relief under the
appropriate chapter of the Bankruptcy Code. In addition, the voluntary
petition will indicate whether the debtor qualifies as a small business
as defined in 11 U.S.C. § 101(51C) and whether the debtor elects to be
considered a small business under 11 U.S.C. § 1121(e).
Upon the filing of a voluntary petition for relief under chapter 11 or,
in an involuntary case, the entry of an order for such relief, the
debtor automatically assumes an additional identity as the "debtor in
possession." 11 U.S.C. § 1101. The term refers to a debtor that keeps
possession and control of its assets while undergoing a reorganization
under chapter 11, without the appointment of a case trustee. A debtor
will remain a debtor in possession until the debtor's plan of
reorganization is confirmed, the debtor's case is dismissed or converted
to chapter 7, or a chapter 11 trustee is appointed. The appointment or
election of a trustee occurs only in a small number of cases. Generally,
the debtor, as "debtor in possession," operates the business and
performs many of the functions that a trustee performs in cases under
other chapters. 11 U.S.C. § 1107(a).
A written disclosure statement and a plan of reorganization must be
filed with the court. 11 U.S.C. § 1121. The disclosure statement is a
document that must contain information concerning the assets,
liabilities, and business affairs of the debtor sufficient to enable a
creditor to make an informed judgment about the debtor's plan of
reorganization. 11 U.S.C. § 1125. The information required is governed
by judicial discretion and the circumstances of the case. The contents
of the plan must include a classification of claims and must specify how
each class of claims will be treated under the plan. 11 U.S.C. § 1123.
Creditors whose claims are "impaired," i.e., those whose contractual
rights are to be modified or who will be paid less than the full value
of their claims under the plan, vote on the plan by ballot. 11 U.S.C. §
1126. After the disclosure statement is approved and the ballots are
collected and tallied, the bankruptcy court will conduct a confirmation
hearing to determine whether to confirm the plan. 11 U.S.C. § 1128.
Chapter 12
In tailoring chapter 12 to meet the economic realities of family
farming, this law has eliminated many of the barriers that family
farmers had faced when seeking to reorganize successfully under either
chapter 11 or 13 of the Bankruptcy Code. For example, chapter 12 is more
streamlined, less complicated, and less expensive than chapter 11, which
is better suited to the large corporate reorganization. In addition, few
family farmers find chapter 13 to be advantageous, because it was
designed for wage earners who have smaller debts than those facing
family farmers. In chapter 12, Congress sought to combine the features
of the Bankruptcy Code which can provide a framework for successful
family farm reorganizations. At the time of the enactment of chapter 12,
Congress could not be sure whether chapter 12 relief for the family
farmer would be required indefinitely. Accordingly, the law (which first
provided that no chapter 12 cases could be filed after September 30,
1993) currently provides that no cases may be filed under chapter 12
after July 1, 2000.
The Bankruptcy Code provides that only a family farmer with "regular
annual income" may file a petition for relief under chapter 12. 11 U.S.C.
§§ 101(18), 109(f). The purpose of this requirement is to ensure that
the debtor's annual income is sufficiently stable and regular to permit
the debtor to make payments under a chapter 12 plan. Allowance is made
under chapter 12, however, for situations in which family farmers may
have income that is seasonal in nature. Relief under this chapter is
voluntary; thus, only the debtor may file a petition under chapter 12.
Chapter 13
Chapter 13 is designed for individuals with regular income who desire to
pay their debts but are currently unable to do so. The purpose of
chapter 13 is to enable financially distressed individual debtors, under
court supervision and protection, to propose and carry out a repayment
plan under which creditors are paid over an extended period of time.
Under this chapter, debtors are permitted to repay creditors, in full or
in part, in installments over a three-year period, during which time
creditors are prohibited from starting or continuing collection efforts.
A plan providing for payments over more than three years must be "for
cause" and be approved by the court. In no case may a plan provide for
payments over a period longer than five years. 11 U.S.C. § 1322(d).
Any individual, even if self-employed or operating an unincorporated
business, is eligible for chapter 13 relief as long as the individual's
unsecured debts are less than $269,250 and secured debts are less than
$807,750. 11 U.S.C. § 109(e). A corporation or partnership may not be a
chapter 13 debtor. Id.
An individual cannot file under chapter 13 or any other chapter if,
during the preceding 180 days, a prior bankruptcy petition was dismissed
due to the debtor's willful failure to appear before the court or comply
with orders of the court or was voluntarily dismissed after creditors
sought relief from the bankruptcy court to recover property upon which
they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e).
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