I get a lot of inquiries regarding types of bankruptcy and thought I would just lay out the different types of bankruptcy and have a short discussion regarding which type is appropriate in certain situations.

Chapter 7 is the type of bankruptcy that makes up a large majority of all bankruptcy cases filed in the United States. It is known as a “liquidation” or “fresh start” bankruptcy. Dischargeable debts are wiped out and non-exempt property is liquidated by a trustee who distributes the money pro rata to unsecured creditors. A chapter 7 case is typically appropriate for people who don’t have any disposable income they can use to repay creditors and who’s debts are primarily unsecured, dischargeable debts like credit cards, medical bills, payday loans, repossession deficiencies, and other unsecured debts.

Chapter 13 is the second most numerous type of bankruptcy. This is a reorganization (repayment) bankruptcy. Typically this option is best for people who have some disposable income they could use to repay all or a portion of their unsecured debt, or for those who need to use bankruptcy to help get caught up on a mortgage they’re behind on, or to prevent repossession on a vehicle. Most chapter 13 cases I see involve an attempt to save a house that is in foreclosure.

There are three other less common types of bankruptcies. Chapter 11 is a business reorganization (repayment). Chapter 11 may also be appropriate for individuals with debt that exceeds the Chapter 13 debt limits. This is the type of bankruptcy several airline companies and other large corporations have filed. Chapter 9 is a bankruptcy to adjust the debts of municipalities. It is rarely used.

Chapter 12 is a reorganization (repayment) plan for family farmer or fishermen. There are a few of these bankruptcies filed every year, typically by family farmers in rural communities. It works similar to a Chapter 13 reorganization, but with specific provisions applicable to family farmers or fishermen.

The bankruptcy reform law in 2005 also created a new Chapter 15 that deals with international cases. The chapter applies where 1) assistance is sought in the US by a foreign court or a foreign representative in connection with a foreign proceeding, 2) assistance is sought in a foreign country in country in connection with a case under this title, 3) a foreign proceeding and a case under this title with respect to the same debtor are pending concurrently, or 4) creditors or other interested parties in a foreign country have an interest in requesting the commencement of, or participating in, a case or proceeding under this title.

I received an email from a person asking me some very good questions about what would happen in a Chapter 13 bankruptcy if the person moved during the Chapter 13, whether the payments in the Chapter 13 would have to change if income changed, etc…

All of these concerns would require a detailed analysis of the particular facts of the case to answer properly, but I can provide some general rules about this. It is not necessary to obtain court permission if you decide to move to a different state during your Chapter 13. Chapter 13 does not put you in prison or on probation. You are free to seek economic opportunity in another state or move with your family, etc… You should, of course, continue to make your Chapter 13 payments and provide your attorney with your new address. The attorney should file a change of address with the court. This insures that you continue to get notice of anything that happens in your case.

The issue of an income change is more complicated. Basically, you have to show proof of income to the trustee at the meeting of creditors and at that time the trustee verifies your income and makes a determination as to whether the trustee can recommend to the judge that your case meets all the requirements for confirmation. Most income and expense issues are ironed out by your attorney, your creditors and the trustee before the confirmation hearing and after the meeting of creditors.

Once the plan is confirmed by the judge, it runs on auto pilot. Something has to happen before someone begins to look at the case again. Either a creditor could claim you haven’t kept up with your payments outside of the bankruptcy, assuming there are any, or the trustee will notice that you aren’t making your payments on time or something like that to call attention to your case. Technically, when your income changes, your plan should change. The bankruptcy law says that debtors must provide all “disposable” income over the life of the plan to repay creditors. This is known as the “best efforts test.” A debtor must use his or her best efforts to repay as much debt as he or she can afford over the plan term.

When your income changes, then technically the plan is supposed to change too. However, the change does not happen automatically. If your income goes down, your attorney must file a motion with the court to “modify” the plan. You will have to provide a new budget and defend the new budget. Of course, there are limits to how low a plan payment can be reduced based on the amount of debt covered in the plan and what your original plan term was (36 months or 60 months). If it is possible to reduce the payments and your circumstances have changed for the worse and you can prove that to the judge, than it is likely the judge would approve the reduction in the plan payments.

If your income has increased and a creditor, the court or the trustee finds out that your income has increased, they could file a motion to dismiss your case claiming that you are no longer doing your “best efforts.” At that point, you’d likely have to file a motion with the court to increase your plan payments to comply with this bankruptcy requirement. As a practical matter, it may not be easy for the trustee, a creditor or the judge to find out your income has increased, so rarely does a debtor face this problem.

Interestingly, the new bankruptcy reform legislation that will go into effect on October 17, 2005 will require debtors to file “annual financial statements” upon request (I guarantee you trustees will request) of a party in interest. Basically this will mean that every year debtors in Chapter 13 will have to provide new budget information. Unless the debtor can show that his/her budget shows the exact same amount of disposable income to demonstrate the debtor’s “best efforts” this could require the debtor to adjust his/her plan payment each year to fit within his/her new budget. This is a new requirement and one that I think was part of the new legislation to try to force debtors to cough up more money in Chapter 13 plans if their financial situation improves during the plan. Again, nothing happens automatically, there would have to be some sort of motion to increase the payments or to decrease the payments.