Different Types of Bankruptcy
Published: July 31, 2013
It’s been nearly five years since one of Michigan’s native sons famously quipped, “Let Detroit go bankrupt.” Of course, when Mitt Romney made that remark in fall 2008, it was in reference to the Big Three auto companies.
It’s ironic how statements can be harbingers of things to come. Of course, GM and Chrysler did declare bankruptcy, each filing for chapter 11 bankruptcy protection in 2009. Five years on, and in the shadow of a mayoral primary, the city known as the cradle of the automobile industry has, itself, now been declared insolvent — and is seeking its own federal bankruptcy protection.
While Detroit’s recovery plan is still unclear, one thing seems certain: Most people have little or no knowledge regarding the different chapters of bankruptcy — unless they’ve been through the process.
So, class, in today’s civics lesson we will go over what the numbers following the word “chapter” mean; while the steps can vary from state to state, each chapter of bankruptcy uses the same terminology and follows the same process. For starters, there are three principal filings for individuals and businesses: Chapters 7, 11 and 13. Chapter 9, which is what the city of Detroit filed on July 18, is designed for municipalities.
According to the federal judiciary’s website, uscourts.gov, Chapter 7 bankruptcy provides for the retiring of an individual’s total debts by gathering and selling his or her “nonexempt” assets and using the proceeds to pay the holder’s claims. A few examples of exempt assets can be your pension, your car (up to a certain value — the Benz is likely gonna get sold), appliances and other items. However, your stamp collection kept in your vacation house — you can kiss both of those items good bye.
This version, designed for cities, towns, villages, counties and school districts, is one of bankruptcy’s most complex — and rare — chapters. It allows municipalities to reorganize their debt by extending the timeline on repayment, and refinance or restructure debt — like reducing principal or interest.
“It requires the municipality to prove that it is eligible to be a debtor by demonstrating that the city is insolvent and that it has negotiated in good faith with its creditor,” explains bankruptcy attorney Scott Wolfson, a principal at Wolfson Bolton PLLC in Troy. “This will likely be the subject of extensive litigation in the city of Detroit’s case.”
Chapter 9 does not allow for a municipality’s assets to be forcibly liquidated. Meaning, unless the city’s state-appointed emergency manager tells the federal bankruptcy judge overseeing Detroit’s reorganization that items like the Detroit Institute of Art’s Van Goghs are “on the table,” assets can’t forcibly be liquidated.
At some point, Detroit will emerge from bankruptcy protection. The best-case scenario, according to Wolfson, is for the city to exit “with a new, court-approved contract with its creditors, known as a plan of adjustment that will permit the city to live within its means.”
While available to individuals, chapter 11 is primarily used for businesses, whether a sole proprietorship, partnership or a national corporation.
“Chapter 11 generally allows businesses to reorganize or sell their assets free and clear of liens,” Wolfson says. For individuals to file for chapter 11, their debts must exceed the limits of the next chapter in our saga, No. 13 ($360,475 of unsecured debt and $1,081,400 of secured debt).
Last but not least, lucky No. 13: This chapter offers individuals the chance to save their homes from foreclosure. It involves a repayment plan in which individuals can repay all or a portion of their debts within three to five years.
“Chapter 13 also has a special provision that protects third parties who are liable with the debtor on ‘consumer debts.’ This provision may protect co-signers,” enumerates the judiciary’s website. “Individuals will have no direct contact with creditors while under chapter 13 protection.”
Princess Gabbara is an editorial intern for Metro Times. Send comments to firstname.lastname@example.org.
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