- Six categories of bankruptcy exists under current bankruptcy codes: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15. Individuals and spouses can file for bankruptcy protection under Chapters 7, 11 and 13. Businesses may file under Chapters 7 and 11. Municipalities file under Chapter 9 and farmers can reorganize their operations under Chapter 12. Chapter 15 provides a mechanism for bankruptcy cases that crosses borders. Personal filings make up most bankruptcy filings, followed by businesses.
- Generally, the debtor initiates the process by filing a petition, and certain financial documents, in the U.S. Bankruptcy Court in New Orleans, Baton Rouge, Shreveport, Alexandria or Opelousas. The court issues an order called an "automatic stay" that prevents creditors from contact the debtor or attempting any activity to collect on the debts. The court assigns the case to a trustee.
- Individuals or spouses who have few or no assets file for Chapter 7. Chapter 7 wipes out certain unsecured debt like department store cards, installment loans and credit cards. You must qualify for Chapter 7 by passing a "means test." The test looks at the household's income for the previous six months and compares it to the median income for a similar family size in Louisiana. If the income exceeds the median income level, the formula subtracts expenses taken from a table that represents the "costs" for the region where the debtor lives in Louisiana. If you fail the test, meaning the household has enough income to repay creditors over five years, you must file for Chapter 13.
Chapter 7 debtors may keep personal and real property up to the amount of the "exemptions" allowed by the federal codes or Louisiana laws. The trustee gathers the rest of the property, if any, sells the assets and distributes the proceeds to the creditors. The court discharges the case, or eliminates certain debts. Chapter 7 does not discharge secured debt, alimony child support and other obligations. - Those with homes, vehicles and other assets they would like to keep usually choose this option. It allows households to pay creditors a portion or all or the debt over a three to five year period under a court-approved plan. Those with debts that exceed the ceilings, $336,900 in unsecured liquidated debts and/or $1,010,650 in secured liquidated debts, must file bankruptcy under Chapter 11. Debtors make payments to the trustee, who pays the creditors until the completion of the repayment plan.
- Typically, partnerships, corporations or other business enterprises that planned to shut down operations may file Chapter 7. Business's owners turn over all of its assets to the court. The trustee sells the property and pays the business creditors. In the case of partnerships, if the money from the sale fails to pay off all the business's debt, the creditors may sue individual partners for the outstanding balance. Chapter 11 works similar to Chapter 13. The business entity continues its operations and renegotiates leases and other contracts. It enters into a plan, approved by its creditors and the court, to repay the obligations over an extended period.
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