July 24, 2020

What are the different types of Bankruptcy?

By: Angi Haen
An iphone with the calculator open and someone holding 50 dollar bills

            The bankruptcy code allows you to pick your business or yourself off of the preverbal floor and start again.  A person or business who has filed bankruptcy is petitioning for bankruptcy relief.  This means they get relief from debt repayment arrangements that prevent the debtor or business from thriving.

            The bankruptcy code is split up into chapters. Each chapter provides different tools for providing relief. In this article, we will summarize the various chapters of bankruptcy filing: Chapter 7, Chapter 9, Chapter 11, Chapter 11 Sub V, Chapter 12, and Chapter 13.

Chapter 7

Chapter 7 is the chapter people generally think of as bankruptcy. It is the “liquidation” type of bankruptcy. At the end of a chapter 7 case, the Bankruptcy Court issues a Discharge Order that wipes away most of the debtor’s debt.  However, the debtor will need to allow the bankruptcy trustee to liquidate (aka sell) some property and use the proceeds from those sales to repay the creditors. 

Chapter 9

Chapter 9 is for municipalities, meaning cities or counties. Chapter 9 provides the financially distressed municipalities with protection from creditors.

Chapter 11

Chapter 11 allows businesses to reorganize their business affairs, debts, and assets. The business owner will propose a reorganization plan. The plan might require a downsizing of the business to reduce expenses or liquidating some assets to repay the creditors. The plan will include some renegotiation of the debts. The Bankruptcy Court will approve a plan that is both feasible and fair to the creditors. The term of the plan is 3-years to 5-years. During the term of the bankruptcy, the Debtor will have relief from its creditors. At the end of the term, the bankruptcy court will likely grant a Discharge Order to wipe away any remaining debts.

Chapter 11, subchapter V

Chapter 11 bankruptcy is known for being both costly and time-consuming. The Small Business Reorganization Act created a new version of Chapter 11, called Subchapter V in February of 2020. Congress designed this subchapter to make Chapter 11 more accessible and affordable for small businesses. Subchapter V allows for business reorganization, like the regular Chapter 11.  However, Subchapter V eliminates or reduces some administrative obstacles and expenses that prevent small business from filing for reorganization under Chapter 11.  Individuals can also file under Subchapter V, and it may be their only option if they do not qualify for Chapter 7 or Chapter 13.

Small business is defined as entities with less than $2,725,625 in debt. However, during the COVID-19 Pandemic, the CARES Act increased the threshold temporarily to $7,500,000 until March of 2021. The higher threshold allows businesses with higher debt levels to repay their loans or debts under the Subchapter V provisions.

Chapter 12

Family farming operations or family fishing operations could use a Chapter 12 bankruptcy process as a tool to help them through financial distress. This process allows such operations to reorganize their debts by paying back a portion of the debts owed over a 3-year to 5-year term.

Chapter 13

Chapter 13 allows individuals to adjust their debts. Rather than wiping away debt as in Chapter 7, a Chapter 13 debtor is paying back a portion of the debts owed over a 3 – 5-year term. Chapter 13 can allow a debtor who would lose assets in a chapter 7 to keep those assets and pay the liquidation amount to the other creditors. Chapter 13 is a good option for individuals who need to file, who have a steady source of income, and who have secured debt such as a car loan.


            In summary, the bankruptcy code is designed to give debt relief to different businesses and individuals. With the use of these tools, they can start again.

Want to find out more? Schedule a call with a Davis Law professional today.

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