The United States Constitution places bankruptcy under Federal jurisdiction and calls for Congress to write laws constituting uniform guidelines. However, the execution is mandated by statute law as found in the Bankruptcy Code located within Chapter 11 of the United States Code. State law also contributes to minor specifics which are not clarified at the federal level.
Under Title 11, there are six types of bankruptcy. Chapter 7 deals with basic liquidation for businesses and individuals. Chapter 9 is for municipal bankruptcy. Chapter 11 is used for reorganization and rehabilitation, generally by business debtors. Chapter 12 pertains to rehabilitation for fisherman and farmers. Chapter 13 is also a form of rehabilitation, but it is for individuals with a regular source of income and entails a payment plan. Lastly, Chapter 15 is used for ancillary as well as other international cases.
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The most common filing is under Chapters 7 and 11. Most consumers file under Chapter 7, and almost all businesses use 7 or 11. In Chapter 7, an individual surrenders all of their property which is not exempt to be liquidated. The funds from the liquidation are then distributed to the creditors. The debtor is granted to a discharge of some debt, but only if he meets legal stipulations and has not demonstrated inappropriate behavior such as concealing records. However, certain debts such as child support or school loans will not be discharged. An individual may only file for Chapter 7 once every eight years.
With Chapter 13, the debtor retains all property and assets but is required to dedicate a percentage of his future income to paying off creditors. The period of repayment and amount of payment vary as they are determined by factors such as the value of the debtor's property and the amount of the debtor's income and expenses. However, a standard time range would be over three to five years. Often secured creditors will be entitled to larger payments than unsecured creditors.
In Chapter 11, the debtor becomes a "Debtor In Possession" DIP as they retain control and ownership of their assets. Bankruptcy Court will work with the debtor and creditors to establish a plan while the debtor still runs his business. Creditors then vote on the proposed plan. The debtor will be permitted to continue to operate and pay back the debt as specified by the plan.
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