In the US, a party can file for either Chapter 7 or Chapter 13 bankruptcy.
In Chapter 7 or ‘straight’ bankruptcy, the applicant surrenders all non-exempt property and assets to an appointed bankruptcy official. These are converted into cash and the proceeds are disbursed to the applicant’s creditors.
This process of liquidation then results in the applicant being freed of all financial obligations within a short period usually not exceeding four months. Obviously, this provision has seen a lot of abuse in the past. The new laws now state that an individual cannot re-apply for Chapter 7 bankruptcy unless he/she has been given discharge from a previous filing for it for at least eight years.
In applying for Chapter 13 bankruptcy, the applicant indicates that he/she intends to repay his/her debts over a period of time. This period may vary from three to five years. Chapter 13 bankruptcy is the preferred kind for applicants who cannot prove complete and irreversible financial insolvency, meaning that they have a source of income that allows them to eventually settle their debts.
Chapter 13 bankruptcy also protects non-exempt property from liquidation and allows the applicant to retain ownership of it. The new bankruptcy law amendments, effective from October 17, are oriented towards encouraging the maximum possible repayment of debts and make it mandatory for certain applicants to file for Chapter 13 bankruptcy.
Chapter 11 or corporate bankruptcy is typically applicable to business entities that wish to restructure and reorganize. Chapter 12 or family farming bankruptcy was a variation formulated in 1986 is applicable to people or qualify as ‘family farmers’. Functionally, it is similar to Chapter 13 bankruptcy, except that its offers a higher debt ceiling than Chapter 13 does for wage earners to people or families who depend on farming for their livelihood.