In the United States, bankruptcy is an option for businesses or individuals who cannot afford to pay their debt.
United States bankruptcy laws are defined in Article 1, Section 8, Clause 4 of the U.S. Constitution, which gives the U.S. Government rights to enforce "uniform laws on the subject of bankruptcies throughout the United States."
Chapters of Bankruptcy
In the U.S., there are five chapters of bankruptcy, each of which coordinates a different type of debt with varying solutions. The five chapters of bankruptcy are:
Chapter 7
This is the most commonly filed chapter of bankruptcy in the United States. Chapter 7 creates laws regarding liquidation – the sale of a business or individual’s assets in order to raise money to pay off debt.
After Chapter 7 bankruptcy is filed, all nonessential or exemptible material is awarded to a third party trustee, who is responsible for liquidating these assets until debt can be paid. Chapter 7 is one option when involuntarily assigned bankruptcy.
Chapter 9
Available only to municipalities, this chapter is used to help restructure the debt of cities, counties and states. This chapter was famously used in 1994 by Orange County, CA to relieve more than $1.5 billion in debt.
Chapter 11
Chapter 11 bankruptcy is available to all businesses and individuals in the United States, but is primarily used by corporations. While Chapter 7 requires a third party trustee to coordinate liquidation, Chapter 11 allows debtors to maintain control of their assets and restructure in order to raise money to pay any debt owed.
Chapter 12
This chapter of U.S. bankruptcy code is available only to farmers, fishermen and their families. Chapter 12 was created in 1986, and was initially supposed to expire in 1993, but was continually expanded until being made permanent in 2005.
Aside from its higher debt ceilings and more exemptions, Chapter 12 is very similar to Chapter 13.
Chapter 13 Bankruptcy
This chapter is designated for individuals, and requires debtors to reorganize their assets under supervision of a bankruptcy court. Bankruptcy court will provide the debtor with a rehabilitation program to pay back debt owed over time.
Chapter 15
The final chapter of bankruptcy deals with cases of debt involving the United States and one or more other countries. In general, it is always best to
avoid bankruptcy.
