The Differences Between Each Type of Bankruptcy
No accounting professional wants to tell their client to give up. Some customers may remind you of the expression, “Why is someone banging their head against the wall?” Because we feel so good when we stop. In many cases, bankruptcy is not the last chapter. It’s an opportunity to draw a line, come to a conclusion, and make a fresh start. Creditors don’t like it, but customers do.
Your customers are legal persons. They feel responsible for their debts. They also want to support their families. Meanwhile, the creditors are making their lives miserable and wanting to grab whatever they can. In some circumstances, bankruptcy can be the happy medium, not the end point.
One of the main attractions of the bankruptcy process is the ability to start over. You and a bankruptcy lawyer help them navigate the process. Once they have fulfilled their obligations, the bankruptcy is discharged. It’s behind them. They can start to rebuild their lives.
Numbers you should know: 7, 9, 11, 12, 13 and 15
You didn’t think it was going to be easy, did you? The acronym “A SKIRT” stands for the six types, 12-7-13-15-11-9. We’ll look at each one, but out of order.
Chapter 7: “S” for Shut
This definition is the conception of bankruptcy by most people. When you play Monopoly and run out of money, you cannot pay your debts and lose your leftover money, houses and hotels.
The goal is to close a business. Operations cease. If you are an individual, you have a very low income. Everything is sold to pay the creditors. The business is closed.
Benefits : here is a court stay imposed on your creditors. They stop chasing you. Any remaining debt is written off after the sale of the assets.
Disadvantage: Creditors can take anything except exempt property. Rules vary by state. If the equity in your home is greater than the homestead exemption, you stay. If it’s lower, the mortgage holder can sell your home and give you the cash value of the homestead exemption.
Chapter 13: “K” is for Keep
This version is the solution that most people who owe money hope to receive. This version is only available for individuals, not for businesses. It is more suitable for people with high incomes, large assets and large debts. The general idea is that you keep almost everything in exchange for committing to a plan to apply your discretionary income to paying down debt. You don’t have to pay off all the debt, the biggest problem is that anything that can go towards debt reduction goes in that direction.
The goal is for an individual to gain some space while retaining their possessions.
Benefits : You can keep most of your belongings. Keep making money. Senior and secured debts need to be paid, but you can get unsecured debt relief.
Disadvantages: s with all the chapters of bankruptcy, there are certain debts that do not go away. Examples are child support and alimony. Although you are allowed to keep your property, you must be able to afford it. The non-exempt property is sold.
Chapter 11: “R” is for restructuring
This type of bankruptcy is often used in the business world. (It can also be used by individuals.) It allows a business to reorganize and keep running. Nieman Marcus, J. Crew and Pier 1 are among the high-profile Chapter 11 bankruptcies of 2020. On the positive side, years ago General Motors and United Airlines entered and exited Chapter 11. It’s expensive.
The company submits a reorganization plan to the court, addressing its debts. He must treat creditors fairly. If the company does not submit a plan, creditors can propose one. The company may choose to sell divisions or brands to raise funds to satisfy creditors. The object is for the company to come out of bankruptcy.
Benefits : The company breathes. The business is still operating. People keep their jobs. There is a plan in place and the light at the end of the tunnel.
Disadvantages: The company cannot make all of its decisions, especially in areas such as union negotiations, expansion or signing of leases. The courts are involved. Creditors must agree to the reorganization plan.
Chapter 15: “I” is for International
Many companies operate overseas. They are subject to the laws of the countries where they operate. Chapter 15 represents a team effort where different jurisdictions cooperate. It is based on the “Model Law on International Commercial Arbitration”. Eighty countries are signatories. It has been around since 1978. This version of the International Bankruptcy Code brings foreign creditors into the US court system to make their case.
Benefits : It gives foreign creditors standing in US courts. US creditors have standing in foreign courts.
Disadvantages: Nothing. It is procedural to see creditors not being ignored.
Chapter 9: “T” is for the city
Municipalities can also have financial problems. Chapter 9 bankruptcies are unique to counties, towns and villages. School districts can also file, but states cannot. These rules protect assets. Properties cannot be liquidated to pay off debts, for example. In the world of municipal bonds, general bond bonds are backed by taxing power. Tax obligations are backed by the operation of certain assets, such as toll roads. Moral obligation obligations are similar to unsecured debt.
The municipality must have a plan approved that would negotiate the repayment of debts owed. Returning to the example of municipal bonds, solutions could include extending maturity dates, reducing the interest rate or even the principal amount.
Benefits : The municipality is authorized to renegotiate its debt. Assets such as buildings cannot be sold or forcibly seized.
Disadvantages: An unelected supervisory authority can be set up
Chapter 12: “A” is for agriculture
There is a special category of bankruptcy specific to farms and fisheries. There are similarities with Chapter 13 regarding asset protection. 50% or more of the declarant’s income must come from farms or fisheries. Since these are individuals, 50% of their debt should come from running the business, not personal debt like a mortgage. The goal is that the farmer can continue to operate his business. This version was introduced in 1986.
Benefits : Creditors also cannot chase consumer debt. The farmer or the fishery can continue the exploitation. They are restructuring their debt.
Disadvantages: Farming or fishing should be the person’s main source of income. There are debt relief limits. The same assets can be used to pay off debts.
Most accounting professionals advise their clients under Chapter 7, 11 or 13.