Chapter 7 – The Liquidation Chapter
The filing of a bankruptcy petition creates an estate which includes all the debtor’s property as of the date of filing. Chapter 7 stands alone as the procedure that provides exclusively for liquidation (reduction to cash) of property of that estate (net of liens and exemptions ) by a trustee, payment of administrative expenses and distribution of any remaining funds to unsecured creditors, rejection of undesirable contracts and leases, and ultimately the discharge of dischargeable debts.
Currently, about 70% of consumer debtors file under chapter 7. Historically, the vast majority of chapter 7 cases (about 95 to 97 percent) yield no assets for creditors. Evidently, debtors who file under chapter 7 seldom lose any property to creditors.
If the debtor demonstrates eligibility to proceed under this chapter, refrains from fraud, makes full disclosure and otherwise complies with the requirements of the Code, the court is sure to grant him or her discharge; and, once the case has been fully administered, it will be closed.
The Restructuring or Reorganization Chapters
Four chapters permit reorganization of the debtor’s financial affairs by the restructuring of secured debts, the rejection of undesirable leases and executory contracts and the payment of whatever is required to be paid to unsecured creditors over time, pursuant to a court-approved plan. The restructuring chapters are chapter 9 (for Municipalities), chapter 11 (General Reorganization), chapter 12 (for Farmers and Fishermen) and chapter 13 (for Individuals with Regular Income).
Although chapter 7 is the most popular liquidation chapter, it is also possible to liquidate within one of the restructuring chapters. This might be done because a debtor having substantial non-exempt property may prefer to control the liquidation process, rather than leave it to a chapter 7 trustee, such as when the debtor believes he or she can get more for the property than the trustee, and thus realize a surplus, or a larger surplus, over the amount necessary to satisfy his or her obligation to creditors. Therefore, a debtor might choose to file under one of the reorganization chapters described below, rather than under chapter 7, and propose a A liquidating plan of reorganization, under which the debtor (rather than a trustee) would personally liquidate assets and make the required distributions to creditors.
Although chapter 13 is generally simpler and less expensive as compared with the other reorganization chapters, access to chapter 13 is limited. A chapter 13 debtor must have regular income and debts within certain limits. A corporation (a term which includes Inc.’s, LLC’s and LLP’s ) is not eligible to proceed under chapter 13. Furthermore, a chapter 13 plan cannot provide for restructured payments over a period that is longer than 5 years.
Ancillary and Cross-Border Bankruptcies
Chapter 15 applies to ancillary and other cross-border cases. This article will not include a detailed description of such cases, since they are not often seen in central Missouri, from whence this article emanates.
Chapters 7 and 13 are often referred to as consumer bankruptcies, because they accommodate the needs of most individuals. During the years 1994 through 2000, nearly all bankruptcy cases were filed under either chapter 7 or chapter 13. Therefore, when consumers have a choice, it is usually between those two.