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In order to file a bankruptcy, a debtor must file a petition for relief with the United States Bankruptcy Court for the district in which he or she resides.
Most common bankruptcy types—Chapter 7 (individual liquidation), Chapter 13 (individual reorganization) and Chapter 11 (corporate reorganization or high-income individual reorganization).
What are the differences?
In a Chapter 7, a Chapter 7 Trustee is appointed to oversee the debtor’s case. This happens automatically from the panel of Chapter 7 Trustees maintained by the Bankruptcy Court. All of the debtor’s non-exempt assets are “pooled” and turned over to the Chapter 7 Trustee to be liquidated and distributed to creditors. Often, a Chapter 7 debtor has no assets to be liquidated, making the case a “no asset” case with no recovery by creditors. In a Chapter 7 case, the Chapter 7 Trustee is responsible for objecting to claims, filing adversary proceedings to challenge the status of security interests, recover “avoidable” transfers, and paying creditors.
In a Chapter 13, a Chapter 13 Trustee is appointed from the panel of trustees to oversee the debtor’s case. The debtor proposes a plan to repay his or her creditors a certain percentage of their debts over a period of time (usually 5 years). The debtor must devote his or her “disposable income” to the repayment plan. In a Chapter 13, both the Chapter 13 Trustee and the debtor can object to claims filed by creditors.
In a Chapter 11 case, there is no trustee. Instead, the debtor remains in possession of its business or assets and is called the “debtor-in-possession”. Most often used for businesses, high-income individuals can also use this process to reorganize their debts and pay creditors. A chapter 11 debtor also proposes a plan for repayment of creditors, and creditors vote on the plan to determine whether it will be confirmed (i.e., accepted) by the Bankruptcy Court. A Chapter 11 case is a powerful tool that permits a Chapter 11 debtor to, among other things, assume or reject leases and contracts, object to claims and recover avoidable transfers made before the case was filed.
Also Chapter 12 (family farmer) and Chapter 9 (municipality) cases—these are much less common.
Once the bankruptcy case is filed, the debtor must file its schedules of assets and liabilities and its statement of financial affairs, which lists various transfers made by the debtor within certain periods of time as well as other financial information
The schedules permit the Trustee and creditors to review the debtor’s assets and the debtor’s idea of what claims will be asserted by creditors
The statement of financial affairs allows the Trustee and creditors to determine if the debtor transferred any assets to insiders within 1 year of the bankruptcy, paid any creditors within the 90 days before the bankruptcy, and gives a general picture of the debtor’s financial situation, including the last several years of income.