Bankruptcy in the United States seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they cannot afford to pay and creditors get paid from whatever assets are not necessary for the debtor’s existence.
Bankruptcy is governed by federal law found in Title 11 of the United States Code. As federal law, it supersedes any conflicting state law by reason of the Supremacy Clause of the Constitution. With the exception of exemptions (i.e., things debtors can keep in a bankruptcy), it is the same from state to state.
Bankruptcy Chapters
There are four kinds of bankruptcy proceedings and they are referred to by the chapter of the federal Bankruptcy Code that describes them. There is Chapter 7, Chapter 11, Chapter 12, and Chapter 13.
Chapter 7 is the most common form of bankruptcy. It is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities among creditors established in the Code.
Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors get a discharge within 3-4 months of filing the case.
If there are assets that are not exempt, the trustee takes control of those assets, sells them and pays creditors as much as the proceeds permit. However, in Colorado, most of the time debtors can keep their home, cars, furniture, clothes, jewelry, and retirement accounts.
Any wages the debtor earns after the case is begun are the debtor’s; the creditors have no claim on those earnings.
Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. Individuals, especially those whose debts exceed the limits of Chapter 13, may file Chapter 11.
In Chapter 11, the debtor usually remains in possession of his assets and continues to operate any business, subject to the oversight of the court and the creditors committee.
The debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization.
Chapter 12 is a simplified reorganization for family farmers, modeled after Chapter 13, where the debtor retains his property and pays creditors out of future income.
Chapter 13 is a repayment plan for individuals with regular income and unsecured debt less than $336,900 and secured debt less than $1,010,650.
The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over time (3-5 years).
Repayment in Chapter 13 can range from 1% to 100% depending on the debtor’s income and the make up of the debt.
Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.
