Bankruptcy is governed by federal law in America. Filling for bankruptcy helps an individual to discard a debt or make a plan on how to repay debts. There are several chapters under which individuals, businesses, and municipalities can file bankruptcy.
Different chapters have different characteristics. For example, Chapter 7 can be used by businesses and individuals. The section is used by individuals to dispose of unsecured loans. For individuals with assets such as second homes and stocks, they must sell to repay unsecured loans. For individuals with no valuable assets, they are not expected to repay any part of the loan (O'Neill, & Renauer, 2019).
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Chapter 11 is used by businesses to file bankruptcy. It aims at helping companies reorganize and become profitable again (‘Bankruptcy Basics’). The section allows preferred stakeholders to receive payments while common stockholders do not receive payments. It will enable a business to continue trading while working on a payment plan. It can be used in rare occasions by individuals (‘An introduction’, 2019).
Chapter 13 is used by individuals who make too much money. It allows businesses and individuals to work a repayment plan. The debt is paid in installments for a period not exceeding five years. It will enable debtors to keep properties, including nonexempt ones (Attorney, 2012).
Bankruptcy has two purposes. The laws offer a fresh start to honest but unfortunate debtors while allowing for equal treatment of creditors. During filling bankruptcy, chapter 7 is used to help individuals and businesses to dispose of their properties to repay unsecured loans. Usually, this is used by parties with valuable assets. Chapter 11 is used to give the business time to reorganize and start making profits, while chapter 13 is used to guide making too much money to come up with payment plans.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed in 2005. The act made the procedure of filing for individual bankruptcy under chapter 7 more stringent. The goal was to prevent abusing the bankruptcy process and to encourage filing under chapter 13, which is harsher than chapter 7. The act meant one had to repay their debts by coming up with a repayment plan (Senbet, & Wang, 2012).
References
Attorney, S. E. (2012). Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time . Berkeley, CA: Nolo.
Chapter 11 - Bankruptcy Basics. (n.d.). Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics
An introduction to chapter 11 of the Bankruptcy Code. (2019). American Business Bankruptcy , 96-100. doi:10.4337/9781786434135.00023
O'Neill, C., & Renauer, A. (2019). How to File for Chapter 7 Bankruptcy . Berkeley, CA: Nolo.
Senbet, L. W., & Wang, T. Y. (2012). Corporate Financial Distress and Bankruptcy: A Survey . Now Pub.
