Types

• The Constitution puts bankruptcy under federal jurisdiction. The U.S. Code, which consists of all the laws passed by Congress, describes several types of bankruptcy that are based on the condition and nature of the debtor and the types of relief available. Specifically mentioned are individuals, corporations, municipalities, family farms, fishermen, and international entities. Two types of bankruptcy relief are generally available, liquidation and debt restructuring.
  
  

Features

• Chapter 7 is designed to handle liquidation. This happens when a person's or corporation's assets are so small as to make any attempt to salvage their current debt structure hopeless. Under chapter 7, a court appointed trustee sells or values all of a debtor's nonexempt assets, which vary widely by state, and pays creditors to the degree possible. With some exceptions, such as student debt, taxes, alimony and child support, the remainder of the debt is forgiven.
  
  

Function

• The purpose of bankruptcy is to take a seemingly impossible situation where a person or business has more debt than can be paid, and find a workable solution for all involved. Most of the time, this means debt restructuring. By lowering interest rates or monthly payments, and occasionally reducing the principal, a debtor is given the opportunity to make good on their obligations and the creditor is able to recover more than in a Chapter 7 liquidation. Restructuring is done under Chapter 11 for corporations, Chapter 13 for individuals, Chapter 9 for municipalities, Chapter 12 for farmers, and Chapter 15 for international entities. The principal feature of bankruptcy restructuring as opposed to other forms of negotiation is the mitigation by a court-appointed trustee between the debtor and the creditors.
  
  

Considerations

• Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, most individuals sought Chapter 7 bankruptcy and the discharge of their debts. The law modified eligibility Chapter 7 liquidation by requiring a means test for anyone earning above the median income in their state. Petitioners are disqualified from Chapter 7 if their monthly income is above $166 after subtracting certain expenses such as clothing, transportation, food and payments on mortgages, cars, child support, alimony, or back taxes.
  
  

Significance

• The Chapter 7 means test sends more individual filers to restructure their debt under Chapter 13, to the benefit of the creditors. Most corporations and municipalities already prefer to restructure their debt rather than liquidate because they are often worth more as a going concern and, in the case of a city, there is usually at least some guaranteed future income due to its tax base.