How Many Kinds of Bankruptcy Are There?

Bankruptcy as a concept is older than the United States, dating back to ancient Greece and Rome. In the U.S., the first federal bankruptcy law was the Bankruptcy Act of 1800...which was almost immediately repealed in 1803.

In fact, bankruptcy legislation in the U.S. has been continually tweaked over the years, with the Bankruptcy Reform Act of 1978 creating the framework for bankruptcy as we know it today. Most crucially, the 1978 legislation created the Bankruptcy Code which established the various chapters and procedures that define our modern version of bankruptcy.

While you may have only heard of two, there are actually six bankruptcy chapters. 

Chapter 7 (liquidation)

This is the most common form of bankruptcy for individuals. It involves the liquidation of non-exempt assets to repay creditors. Once the assets are liquidated, the remaining eligible debts are discharged.

• Involves sale of assets to repay debtors
• Need to pass a "means test" to be eligible for Chapter 7
• Established for debtors that do not have the ability to pay their existing debts
• Once non-exempt assets are sold, remaining debts will be discharged and debtor will have no remaining legal obligation

Chapter 9 (municipal)

This chapter is specifically designed for municipalities, such as cities, towns, and school districts, to restructure their debts. It allows them to create a plan to repay creditors while continuing to provide essential services to residents.

• Only available for municipalities (not individuals)
• The municipality must be considered insolvent
• Municipality must attempt negotiation directly with creditors first before attempting to file for Chapter 9 bankruptcy

Chapter 11 (reorganization)

Used primarily by businesses to reorganize their debts while remaining operational, Chapter 11 allows the debtor to propose a plan of reorganization to creditors, which typically involves restructuring debt, renegotiating contracts, and possibly selling assets.

• Typically for businesses (although individuals may be able to file under certain circumstances
• Filers generally get to avoid selling assets, with focus on altering terms of debt to aid in repayment
• Impacted creditors may be allowed to vote on the plan

Chapter 12 (family farmer or fisherman)

Chapter 12 is specifically geared toward the needs of farmers and fishermen. In a way it represents a middle ground between Chapter 11, which is too expensive and better suited for larger corporations, and Chapter 13, which is better for individuals with lower amounts of debt. 

• Limited to commercial farmers and fishermen
• Limited to family-run businesses (over half the stock or equity must be held by one family or one family and its relatives)
• Debtors propose a 3-5 year installment plan to repay their creditors
• Total debts can't exceed $11,097,350 for farmers or $2,268,550 for fishermen.

Chapter 13 (debt adjustment)

Known as the wage earner's plan, Chapter 13 allows an individual with a regular income to keep their assets and create a multi-year repayment plan to satisfy all or some of their debts.

• Does not require the sale of non-exempt assets
• May be used to help stop a potential foreclosure
• Consolidates included creditors into one payment that goes to the trustee
• Plan is complete in 3-5 years as soon as payments are made as required

Note that while both Chapter 7 and Chapter 13 bankruptcy may help stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities, neither will erase child support, alimony, fines, taxes, and most student loan obligations.

Chapter 15 (cross-border cases)

This chapter deals with cases involving parties from multiple countries and creates a framework for cooperation between U.S. courts and foreign courts in handling international bankruptcies.

• A chapter 15 case is typically secondary to a primary proceeding brought in another country 
• Debtor or a creditor may choose to file a full chapter 7 or chapter 11 case in the United States if the assets in the United States are sufficiently complex

If you're serious about pursuing a potential bankruptcy, it's always a good idea to work with a qualified attorney. But if you're struggling with debt and weighing your options, consider working with a credit counselor first. MMI offers free credit counseling 24/7, online and over the phone. We can help you review your finances, weigh your options, and get started with the best plan for your goals.