Throughout history, financial crisis has affected the lives and relationships of individuals and businesses. Regardless of the era, unemployment, illness, unforeseen disaster, and technological advance have all caused financial failure. The methods developed by societies to resolve the effects of financial crisis are known as Bankruptcy systems. Bankruptcy systems exist in any society where there are debtors (those who owe) and creditors (those who are owed). Bankruptcy refers to the status of a person who has been legally declared insolvent.
The bankruptcy law is now properly known as the Bankruptcy Code. The Bankruptcy Code is divided into eight chapters. It is primarily a self-contained system designed to resolve the financial affairs of a debtor.
Chapter 7: is the most common proceeding, it’s described as a liquidation. In a liquidation proceeding, all the non-exempt assets of a debtor are sold. Under chapter 7, a trustee is appointed to collect and sell. The proceeds are distributed to creditors according to their ranking.
Chapter 9: applies only to Municipal Corporations- a city.
Chapter 11: is a business reorganization.Creditors vote on whether to accept or reject a plan , which also must be approved by the court. While the debtor remains in control of the assets, the court can order the appointment of a trustee to take possession and control of the business.
Chapter 12: is a reorganization proceeding for family farmers. Family farmers must propose a plan to repay their creditors over a three-to five year period and it must be approved by the court. Plan payments are made thru a Chapter 12 trustee, who also monitors the debtor’s farming operations during the pendency of the plan.
Chapter 13: is the second most common proceeding, is a consumer reorganization for individuals with regular income where a qualified individual seeks expedited and summary approval of a repayment plan for a small consumer estate. Chapter 13 permits indif=viduals to keep their property by repaying creditors out of their future income. Each Chapter 13 debtor prepares a plan to pay and rearrange their debts, which must be approved by the bankruptcy court. The debtor receives a discharge after they complete their repayment plan. Chapter 13 is only available to individuals with regular income whose debts do not exceed $1,000,000.00 ($250,000 in unsecured debts and $750,000 in secured debts).