The Four Chapters Of Bankruptcy

Bankruptcy is not new, even though you can't pick up a newspaper, turn on the TV or surf the Web these days without encountering the word. The earliest mentions of the word date to the early 1500s. In the United States, the condition of bankruptcy is as old as the nation itself, being an early part of the Constitution (Article 1, Section 8, Clause 4). Various codes and acts have been utilized during the years since that time; including 1978, and more recently in 2005.

Every entity, from an individual person to a large corporation, may become bankrupt. This situation most often arises through no fault of the person or company – but may also be because of unwise handling of resources. The law finds little difference between them.

The archaic description of bankruptcy is: reduced to a state of financial ruin. Basically, when your outgo exceeds your income with no possibility of catching up in the foreseeable future, you are eligible to file for bankruptcy. Many ask whether they will have to relinquish certain assets during bankruptcy. In most cases, the answer is no

Bankruptcy protection is a right available to every United States citizen under Federal law. According to the U.S. Constitution, all bankruptcy matters are placed under Federal Jurisdiction and Congress is charged with enacting uniform laws on the subject. The Bankruptcy Code can be found in Title 11 of the statutes known as the United States Code. But not all law pertaining to bankruptcy is Federal. There are places in the Bankruptcy Code where federal law either is coexistent with, or defers to, state law.

Here in Ohio, state law plays a major role in bankruptcy cases, despite the fact that the proceedings take place in the United States Bankruptcy Court. For example, all exemptions applied to shield a Debtor's assets are determined strictly according to Ohio law. Although there is a regime of federal exemptions permitted in other states, Ohio's state exemptions are exclusive.

There are four chapters under which a Debtor may seek bankruptcy protection:

  • Chapter 7: Liquidation. This is the type of relief most consumers seek - a complete discharge of all unsecured debt, including credit cards and medical expenses. A case brought under this provision can be the simplest and quickest vehicle to a fresh start.
  • Chapter 11: Reorganization. This chapter is attractive mostly to corporations seeking to rehabilitate a business. However, it is also designed to assist individuals with substantial assets to reorganize their affairs. This chapter should be approached with caution since its provisions are complex and decisions thereunder best approached with the assistance of competent counsel.
  • Chapter 12: Family Farmer or Fisherman. This section of the Code allows family farmers and fishermen to enter into a repayment plan similar to a Chapter 13 Wage Earner Plan.
  • Chapter 13: Wage Earner Plan. This form of bankruptcy allows individuals with regular income to develop a repayment plan for all or some of their outstanding debt. It is especially attractive to Debtors wanting to hang onto major assets (e.g., a house or a car) that are in danger of foreclosure or repossession. There are also attractive features allowing for the recharacterizing of undersecured debt, like cramdowns on older vehicles and stripping of second mortgages.

Voluntary Versus Involuntary Bankruptcy

This definition is rather simple: if the debtor petitions the bankruptcy court for relief, it is voluntary. If the creditors appeal for relief, the petition is involuntary. Fortunately, the latter is rare.

The most common cases filed in Bankruptcy Court fall under Chapters 7 and 13. Almost 70% of all bankruptcies are Chapter 7 cases. Corporations and wealthy individuals tend to file under Chapter 7 or Chapter 11.

Everyone's particular financial challenges are unique. Therefore, it is wise to consult a competent bankruptcy attorney first before deciding on a strategy to deal with these challenges