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The Six Types of Bankruptcy in the United States

Jul 15, 2008
Bankruptcy or economic failure is an officially declared term defining the failure or impairment of organizations or individuals to pay off their debts. The legal formalities approve creditors to file a bankruptcy petition against debtors in an effort to recover the debt.

In several cases, debtors start bankruptcy formalities called voluntary bankruptcy filed by the bankrupt organizations or bankrupt individuals.

In the Older Testament of Hebrew Scriptures and the Bible, Moses Laws advised that one Jubilee Year or Holy Year need to take place every half century, after the elimination of all debts among Jews and after the release of all debt-slaves.

Bankruptcy in the United States:

In the United States, bankruptcy is a subject placed under the Federal Jurisdiction by the United States Constitution (Article 1, Section 8, Clause 4), which permits the legislative body to ordain standardized laws on the topic of bankruptcies across the United States.

Its execution is however, seen in ruling law. The appropriate legislative acts are integrated within the Bankruptcy Code, sited at Title 11 of the United States Code. The state law overdraws these acts in several places, where federal law either fails to act or specifically remits the state law.

Usually, lawyers file economic failure cases in the United States Bankruptcy Court, which is an association of the U.S. District Courts. Numerous insolvency cases, specifically in terms of validity of exemptions and claims mainly depend on State law. Therefore, State law plays a vital role in various insolvency cases. In addition, it is many times impossible to simplify insolvency law across various states of America.


There are six types of insolvencies under the Bankruptcy Code in the Unite States:

Chapter 7: This is a type of basic liquidation for businesses and individuals

Chapter 9: Civil economic failure

Chapter 11: Reorganization or rehabilitation, used mainly by corporate debtors, but is sometimes also used by individuals with huge assets and debts

Chapter 12: Rehabilitation chapter for fishermen and family farmers

Chapter 13: It is a rehabilitation chapter with a payment plan for people having normal income source

Chapter 15: It is an economic failure chapter for subsidiary and other global cases.

The most regular types of personal economic failure filings in the U.S. are Chapter 13 and Chapter 7. A national report revealed that around 65% of all U.S. consumer filings appear under Chapter 7. Organizations and other business classes file under Chapter 11 or Chapter 7.

Common Insolvency Chapters in the United States:

Chapter 7

Chapter 7 claims for deals with consumer economic failure. Here, people lack adequate funds to pay off their creditors. It then gives such debtors certain time to solve this problem and to help them pacify their creditors. Here, the entire property of a debtor goes into the custody of bankruptcy trustee. The trustee ensues to transform the property into cash and after liquidating the entire property into cash, the trustee then distributes funds to creditors to clear all debts.

Chapter 13

In various insolvency cases, creditors try to push debtors to pay them. This type of recovery may include harassment through phone calls or through personal visits. Chapter 13 insolvency code is the best way for debtors to avoid such harassment. This chapter allows a court to keep an eye on the progress of debt payment by a debtor and on recovering activities of creditors.

Chapter 11

Here, debtors regain control and ownership of their assets and are called 'debtor in possession' (DIP). Creditors and debtors work with the Bankruptcy Court to negotiate on the debt amount. If a negotiated plan is confirmed, then debtor continues to operate and pay the debts under conditions agreed in that confirmed plan.
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