Bankruptcy code

Bankruptcy is a financial term you need to understand. Here’s what it means.

What is the bankruptcy code?

Appearing in Title 11 of the United States Code, the federal bankruptcy code defines various types of bankruptcies available under U.S. law. The most common types of bankruptcies include Chapters 7, 9, 11, 12, and 13. The type of bankruptcy a debtor is entitled to depends primarily on whether they are a corporation, a municipality, or an individual.

Deeper definition

When a debtor faces serious debt problems, one option is to file bankruptcy. When filed, bankruptcy can stop some creditors from seeking damages against the debtor in court, discharge some debts, and allow debtors to get a fresh start, free from the burden of their debt.

Bankruptcies also have a certain restriction on how often debtors can file. This is necessary to keep debtors from taking advantage of the system. Other restrictions include meeting certain income-level requirements and proving in a court of law that the debt accrued can’t be paid.

Depending if the debtor is an individual, business, or municipality, different chapters of the bankruptcy code apply to the debtor.

Chapter 7 is available to both businesses and individual consumers. It usually involves the liquidation of qualifying assets to help repay the debt involved. In order to qualify for a Chapter 7 bankruptcy, the debtor’s income level must not exceed a certain amount, as set by individual states.

Chapter 9 deals specifically with municipal entities, such as utility companies, school districts, and cities. This form of bankruptcy was specifically designed to allow the restructuring of debts by municipalities without having to resort to the liquidation of assets.

Chapter 11 allows an individual or a business to reorganize debt. More commonly filed by businesses, this form of bankruptcy allows debtors to repay part or all of their debt according to a repayment plan.

Chapter 12 specifically deals with family farmers and fishermen. This type of bankruptcy allows such individuals to repay all or part of the debt involved while still remaining in operation.

Chapter 13 enables individual wage earners to repay all or part of their debt as part of a repayment plan.

Chapter 15 bankruptcy deals specifically with debt incurred in a country other than the U.S. A Chapter 15 bankruptcy provides the mechanism by which such cross-border cases are handled in the U.S. court system.

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Bankruptcy example

A debtor files the appropriate bankruptcy in the court where the case is brought for review. The judge overseeing the bankruptcy determines if the debtor qualifies for the bankruptcy and what actions, if any, the debtor needs to take. Certain debts, such as any taxes owed, child support, and student loans are not eligible for discharge as part of a bankruptcy.

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