Bankruptcy is a complex legal procedure that involves different types of filings, each with its own unique features and requirements. Although the procedures and conditions vary for each type of bankruptcy filing, their common purpose is to enable individuals, businesses, and municipalities to eliminate or repay their debts while protecting their assets from creditors. This blog post will provide a general overview of the various types of bankruptcy filings and their significance.
Voluntary Petition vs. Involuntary Petition
A voluntary petition is a bankruptcy filing initiated by the debtor, while an involuntary petition is filed by the debtor’s creditors. A voluntary petition is a more common filing and allows the debtor to choose the type of bankruptcy and the applicable chapter. In contrast, an involuntary petition is filed when the debtor is unable to pay its debts, and its creditors seek to force the debtor into bankruptcy.
Overview of Bankruptcy Chapters
Bankruptcy cases are generally filed under specific chapters of the Bankruptcy Code. Several factors impact the filing options available to a potential debtor, including, among other things, whether the potential debtor is an individual or business entity, the amount of debt, current and future income, and the potential debtor’s reason(s) for filing for bankruptcy. With these considerations in mind, the most common types of bankruptcy are:
a. Chapter 7 – Liquidation
Chapter 7 bankruptcy is also known as liquidation bankruptcy, as it involves the sale of the debtor’s non-exempt assets to repay creditors. This chapter is available to both individuals and businesses and is generally the quickest and most straightforward form of bankruptcy.
b. Chapter 11 – Reorganization
Chapter 11 bankruptcy is a reorganization bankruptcy for businesses or individuals with a significant amount of debt. The debtor continues to operate while developing a plan to repay creditors over time, typically three to five years.
c. Chapter 13 – Individual Only
Chapter 13 bankruptcy is available to individuals with regular income, allowing them to restructure their debts and repay their creditors over a three to five-year period while keeping their assets. Although businesses cannot file for bankruptcy under Chapter 13, sole proprietors filing for bankruptcy as individuals under Chapter 13 can include both their personal and business debts.
d. Chapter 12 – Family Farmer
Chapter 12 bankruptcy is designed for family farmers and fishermen who have regular annual income and are struggling with debt. It allows them to restructure their debt and keep their assets while continuing to operate their farm or fishing business.
e. Chapter 9 – Municipalities
Chapter 9 bankruptcy is available to municipalities, such as cities, towns, and counties, that are unable to pay their debts. It allows them to restructure their debts while continuing to provide essential services to their constituents.
f. Chapter 15 – Ancillary to Foreign Insolvency
Chapter 15 bankruptcy provides a framework for handling cross-border insolvency cases, allowing foreign debtors to seek relief in the United States while protecting the rights of domestic creditors.
Creation of Estate and Automatic Stay
When a debtor files for bankruptcy, an estate is created that encompasses all legal and/or equitable interests of the debtor in property as of the commencement of the case. Simultaneously, an automatic stay goes into effect, which prohibits creditors and third parties from continuing or commencing any action or proceeding against the debtor or property of the bankruptcy estate.
Bankruptcy Trustee vs. U.S. Trustee
In bankruptcy cases, there are two types of trustees—bankruptcy trustees and the U.S. trustee trustees. A bankruptcy trustee is appointed in every case filed under Chapters 7, 12, and 13. In limited circumstances and for cause, a bankruptcy trustee may also be appointed in cases filed under Chapter 11. When appointed, the bankruptcy trustee becomes responsible for overseeing the liquidation or reorganization of the debtor’s assets.
The U.S. Trustee is a federal official responsible for monitoring the conduct of bankruptcy parties, overseeing related administrative functions, supervising bankruptcy cases, and ensuring compliance with bankruptcy laws.
Security Interests Preserved
Generally, property a debtor acquires post-petition is not subject to a creditor’s pre-petition lien or security interest. However, a creditor with a pre-petition lien on the debtor’s property retains its security interest in the property the debtor owned or acquired before filing for bankruptcy. If provided for in the applicable security agreement, the creditor’s interest can extend to post-petition “proceeds, products, offspring, or profits” derived from the property that was subject to the pre-petition lien.
Bankruptcy is a complex legal procedure, and both debtors and creditors should engage experienced bankruptcy counsel to help navigate these processes and protect their interests.
Click here to learn more about Bast Amron’s Bankruptcy practice.
About Hunter Grasso
Hunter Grasso concentrates his practice in the areas of bankruptcy, insolvency, and commercial litigation. Prior to joining Bast Amron, Hunter practiced in the Miami office of a national firm and gained litigation experience representing developers and general contractors in complex commercial disputes. He also served as a Judicial Extern to the Honorable A. Jay Cristol, Chief Judge Emeritus U.S. Bankruptcy Court, Southern District of Florida, and as a Judicial Extern to the Honorable Laurel M. Isicoff, Chief Judge, U.S. Bankruptcy Court, Southern District of Florida. Click here to learn more.