Bankruptcy Overview

Under the United States Bankruptcy Code, different chapters of bankruptcy exist to address the financial situations of different types of debtors. Chapter 7 bankruptcy is commonly called liquidation bankruptcy. It is typically filed by individuals, married couples, or businesses that do not have sufficient income to repay their debts. There is no strict debt limit to qualify, but individual filers must pass a “means test,” which compares their income to the median income in their state. In a Chapter 7 case, a court-appointed trustee may sell non-exempt assets to repay creditors, although many filers keep most of their basic property because exemptions protect essential items such as a primary vehicle, household goods, or limited home equity. If the case is successful, most unsecured debts—such as credit card balances, medical bills, and personal loans—are discharged, meaning the debtor is no longer legally required to repay them. However, some obligations usually remain, including most student loans, recent taxes, and child support or alimony.

Chapter 13 bankruptcy is designed for individuals who have regular income but need time to repay their debts. It allows a debtor to create a court-approved repayment plan that typically lasts three to five years. To qualify, the person’s combined secured and unsecured debts must generally be below a statutory limit (currently around $2.75 million under temporary adjustments enacted in recent years). Instead of liquidating assets, the debtor makes monthly payments to a bankruptcy trustee, who distributes the funds to creditors according to the approved plan. People often file Chapter 13 to catch up on missed mortgage or car payments, stop foreclosure, or protect property that might otherwise be sold in a Chapter 7 case. If the debtor completes the repayment plan successfully, any remaining eligible unsecured debt is discharged.

Chapter 11 bankruptcy is primarily used by businesses seeking to reorganize their finances while continuing to operate. Corporations, partnerships, and limited liability companies commonly file under this chapter, though individuals with very large or complex debts may also use it. Chapter 11 generally does not impose strict overall debt limits, although smaller businesses may qualify for streamlined procedures under special provisions such as Subchapter V. During the case, the business usually remains in control of its operations as a “debtor in possession.” It proposes a reorganization plan that restructures debts, modifies payment terms, or reduces obligations with creditor approval and court confirmation. If the plan is approved and implemented successfully, the company continues operating with a more manageable debt structure.

Chapter 12 bankruptcy is a specialized form of reorganization designed specifically for family farmers and family fishermen with regular annual income. It recognizes that agricultural and fishing businesses often have seasonal income and high secured debts related to land, equipment, or vessels. Eligibility requires that the debtor meet certain definitions of a family farmer or fisherman and stay within specific debt limits (currently over $11 million for farmers and roughly $2.5 million for fishermen, adjusted periodically). Like Chapter 13, Chapter 12 involves a repayment plan lasting three to five years. The plan allows debtors to repay a portion of their debts based on their income and business projections. If the debtor completes the plan successfully, remaining qualifying debts may be discharged.

Chapter 9 bankruptcy applies only to municipalities, such as cities, counties, school districts, and certain public utilities. It is intended to help local governments restructure their debts while continuing to provide essential public services. Unlike other bankruptcy chapters, municipalities cannot be forced to liquidate their assets, and the court’s authority over governmental operations is limited. Instead, the municipality proposes a plan to adjust its debts, which may include extending payment schedules, reducing principal amounts, or refinancing obligations. A well-known example is the bankruptcy filed by Detroit in 2013. If the court approves the plan and it is carried out successfully, the municipality emerges from bankruptcy with restructured financial obligations that are more sustainable.

Minnesota's Bankruptcy Specialist.