Although the term “bankruptcy” is bandied about in multiple situations, it is, in fact, a term for a specific legal process. The term’s genesis is from the Italian language, which roughly translates into “broken bench,” with bench being an item used by bankers. If a banker’s bench was publicly broken, it indicated that that banker had failed to meet some financial obligations, although there are claims that the bench story is closer to folk legend than to reality.
What Is Bankruptcy?
Bankruptcy is a type of legal process that is instigated when a person or business (the debtor) is unable to meet its outstanding debts or obligations to others (the creditor or creditors). It starts when a debtor files a petition, which starts the proceedings. In bankruptcy, the debtor’s assets are examined, and these assets may be used to repay the creditors. It isn’t the only game in town for debtors who are unable to meet their obligations, but it is certainly one of the most common ones. For each kind of bankruptcy, there are different chapters of bankruptcy, each of which meets a specific situation. These are explained below.
What Are the Different Bankruptcy Chapters?
Like virtually every other type of business term, there are various flavors of bankruptcy, some of which are for individuals, while others are strictly used for corporations or other business entities. It’s also important to note that the following forms of bankruptcy are for the United States only; other countries have different ways of dealing with debtors and creditors. In addition, although these chapters are the same everywhere in the United States, some specific bankruptcy laws vary from state to state, so there are some things that are applicable in some states and not in others. The chapters of bankruptcy include the following.
1. Chapter 7
Perhaps the most common type of bankruptcy, Chapter 7 (commonly referred to as “liquidation” or “straight bankruptcy”) is used for individuals who have filed for bankruptcy. In most cases, a court-appointed trustee works with you to liquidate your assets in order to repay your creditors. In most instances, debtors are allowed to keep their primary residences, retirement accounts and other basic necessities. And while a lot of unsecured debt (for instance, credit cards and medical bills) is typically erased, other types of debt (for instance, unpaid taxes and student loans) remain as obligations and will have to be paid eventually. A Chapter 7 bankruptcy stays on your record for seven years, and you are not allowed to file again until after eight years.
2. Chapter 13
The other big one for individuals, Chapter 13 means that filers have their debt reorganized, not necessarily forgiven. In this instance, the court approves a repayment schedule in order to pay back both your secured and unsecured debt over a set time period, typically three to five years. In contrast to Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to retain all your assets and set a timetable to repay creditors. Similar to Chapter 7, it remains on your credit report for seven years, but you can refile after two years.
3. Chapter 12
Chapter 12 bankruptcy is used by family farmers or family fishermen who are considered to have “regular annual income.” It enables those who are financially distressed in those businesses to pay debts owed over time. Unlike Chapter 13, it is far more flexible and is prone to having higher debt limits.
4. Chapter 11
Chapter 11 is the standard type of bankruptcy that businesses use when in financial dire straits. Like Chapter 13, it allows flexibility for the debtor to continue to operate while paying off debt, using a plan that has been approved by the court. It is usually reserved for businesses, but in some instances, individuals, such as high-value real estate investors or highly paid professional athletes, can file under Chapter 11.
5. Chapter 15
A (relatively) new addition to the Bankruptcy Code (introduced in 2005), Chapter 15 Bankruptcy deals with international bankruptcy issues and gives overseas debtors access to the United States Bankruptcy Courts. In most instances, the debtor is from outside the United States.
6. Chapter 9
This is a municipal type of bankruptcy filing, used by towns, cities, counties, taxing districts, municipal utilities and school districts. Similar to the others, Chapter 9 provides municipality protection from creditors while drafting and negotiating a plan for adjusting debts.
Using a VDR During Bankruptcy
Needless to say, the amount of documentation required for any type of bankruptcy proceeding is enormous, and of course the information must be kept confidential. In order to expedite the process (as well as to save on the cost of an old-school “data room”), some sort of secure online repository is required, one where all parties involved in the process can store, share and edit documents. The solution for this problem is a virtual data room (VDR).
A VDR is an online “deal room,” where the documents required for a bankruptcy proceeding are stored and can be strictly controlled for security purposes. The features that a quality VDR vendor provides include document and version management, top-level encryption, backup, high-level administrative controls and multiple layers of security. These can all be configured to allow only certain parties access to specific documents.
The CapLinked Solution
CapLinked, a leader in the VDR space, is a provider of secure virtual data rooms for all types of bankruptcy proceedings. Its VDRs feature a user-friendly interface that is compatible with virtually every OS, and, because of that, it gives users the ability to upload and download documents from virtually any type of computer, tablet or smartphone from anywhere around the globe. Its VDRs ensure that all the highly confidential documents remain secure, helping to verify the integrity of the proceedings. To learn more about how CapLinked can save both time and costs on any bankruptcy with its cutting-edge VDRs, start a free trial today.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
United States Courts – Bankruptcy Basics
National Foundation for Credit Counseling (NFCC) – The Different Chapters of Bankruptcy Explained