Understanding Chapter 7, Chapter 11 and Chapter 13 Bankruptcies

Bankruptcy laws are crucial for businesses and individuals facing financial difficulties, providing a legal framework to manage their debts and obligations. In India, bankruptcy and insolvency matters are governed by the Insolvency and Bankruptcy Code (IBC), 2016. While the Indian bankruptcy system follows a distinct set of rules, it is often compared to bankruptcy laws in other jurisdictions like the United States, which includes Chapter 7, Chapter 11, and Chapter 13 of the U.S. Bankruptcy Code. This blog will explore these U.S.-specific chapters while contextualizing their relevance to India’s IBC framework.

The U.S. Bankruptcy Code: An Overview

In the U.S., bankruptcy law is divided into several chapters under the Bankruptcy Code (Title 11 of the United States Code). The most frequently used chapters are:

1. Chapter 7: Liquidation
2. Chapter 11: Reorganization (mainly for businesses)
3. Chapter 13: Adjustment of Debts (primarily for individuals)

These chapters serve different purposes and offer varying forms of relief depending on the financial situation of the debtor.

Understanding Chapter 7, Chapter 11, and Chapter 13 Bankruptcies in India

Although India does not have the same chapter-based bankruptcy system as the U.S., there are some comparable elements under the Insolvency and Bankruptcy Code (IBC), 2016. The IBC was enacted to provide a comprehensive and effective process for resolving insolvency issues in India, both for individuals and businesses. To understand the Indian system better, we will compare the key features of Chapter 7, Chapter 11, and Chapter 13 of U.S. bankruptcy law with India’s insolvency framework.

Chapter 7 Bankruptcy in the U.S. – Liquidation

U.S. Chapter 7: Liquidation Overview

Chapter 7 bankruptcy in the United States involves the liquidation of a debtor’s non-exempt assets by a court-appointed trustee. The assets are sold off to pay creditors, and once the liquidation process is complete, the debtor is typically discharged from any remaining debt obligations.

• Eligibility: Individuals, partnerships, corporations, and LLCs can file under Chapter 7.
• Process: A trustee is appointed to oversee the sale of assets. Once the debts are paid, the debtor receives a discharge, which releases them from most debts.
• Outcome: In exchange for liquidation, the debtor gets a fresh start, although they lose most of their assets.

Indian Equivalent to Chapter 7: Liquidation under the IBC

In India, Chapter 7 of the U.S. Bankruptcy Code is most similar to the liquidation process under the Insolvency and Bankruptcy Code (IBC), 2016. Liquidation is the final stage in the insolvency process when a business or individual cannot be rescued through resolution.

• Section 33 of the IBC deals with the liquidation process, which begins when the Corporate Insolvency Resolution Process (CIRP) fails, and no resolution plan is approved by the creditors.
• Procedure: A liquidator is appointed to sell off the debtor’s assets and distribute the proceeds among creditors.
• Outcome: Similar to U.S. Chapter 7, the assets are liquidated, and the company is dissolved. The debtor gets discharged from further debt, but the process can take several months or even years.

Chapter 11 Bankruptcy in the U.S. – Reorganization for Businesses

U.S. Chapter 11: Business Reorganization

Chapter 11 of the U.S. Bankruptcy Code is primarily used by businesses to reorganize and continue operations while restructuring their debts. Under Chapter 11, the debtor company remains in control of its operations, although a court-appointed trustee may be assigned in certain cases.

• Eligibility: Primarily for businesses, but individuals with substantial debt can also file for Chapter 11.
• Process: The debtor proposes a reorganization plan, which is subject to approval by creditors and the court. During this period, creditors cannot initiate collection actions.
• Outcome: The goal is to help the company return to profitability. If successful, the company exits bankruptcy with reduced debt and a viable business model.

Indian Equivalent to Chapter 11: Corporate Insolvency Resolution Process (CIRP)

India’s equivalent to Chapter 11 reorganization is the Corporate Insolvency Resolution Process (CIRP) under the IBC, 2016. CIRP allows companies to restructure their operations and resolve debts while continuing to operate, instead of opting for liquidation.

• Initiation: The CIRP can be initiated by creditors or the debtor itself if there is a default of Rs. 1 crore or more in debt (increased threshold as per recent amendments).
• Process: During CIRP, the company’s operations are handed over to an Interim Resolution Professional (IRP), who manages the day-to-day affairs. Creditors form a Committee of Creditors (CoC) to evaluate the viability of a resolution plan proposed by the debtor or an external party.
• Resolution Plan: A resolution plan must be approved by the CoC and the National Company Law Tribunal (NCLT). If the plan is successful, the company exits the process with restructured debt, and the business continues operations.
• Outcome: If no resolution is reached, the company may be liquidated.

Chapter 13 Bankruptcy in the U.S. – Debt Adjustment for Individuals

U.S. Chapter 13: Individual Debt Adjustment

Chapter 13 bankruptcy in the U.S. is a reorganization plan for individuals with regular income who are unable to pay their debts in full. It allows individuals to retain their property and reorganize their debt payments over a 3-5 year period under the supervision of a court-appointed trustee.

• Eligibility: Primarily for individuals with a regular income. The debtor must have less than $1,257,850 in secured debts and $419,275 in unsecured debts (limits as of 2024).
• Process: The debtor proposes a repayment plan to the court that consolidates all debts into one monthly payment. The trustee distributes payments to creditors.
• Outcome: At the end of the repayment period, the debtor receives a discharge from remaining unsecured debts that were part of the plan.

Indian Equivalent to Chapter 13: Individual Insolvency under the IBC

In India, the Individual Insolvency and Bankruptcy Process applies to individuals who cannot pay their debts. The process for individuals was introduced under the IBC, with provisions for personal insolvency in Chapter II (Sections 78-187) of the IBC.

• Initiation: An individual can initiate the insolvency process if they owe at least Rs. 1,000 (threshold revised from Rs. 1 lakh previously).
• Process: Once the application is filed, the debtor can propose a repayment plan under the Repayment Plan (RP), which the creditors and the Insolvency Resolution Professional (IRP) will evaluate.
• Outcome: If a feasible repayment plan is agreed upon, the individual is given a chance to repay their debts in installments over a period of time, typically up to 3 years. If the plan is successful, the individual exits the insolvency process.

However, unlike Chapter 13 in the U.S., which is a formal restructuring plan, India’s process is more rigid and focused on providing a fresh start to individuals by discharging them from their debts post-resolution.

Key Differences Between U.S. Bankruptcy and India’s IBC

1. Scope:
   • U.S. Bankruptcy Code offers tailored chapters for businesses and individuals alike, with Chapter 11 focusing on business reorganization, Chapter 7 on liquidation, and Chapter 13 on individual debt adjustment.
   • Indian IBC is broader in scope, with a particular emphasis on corporate insolvency resolution through CIRP, although individual insolvency is still developing.
2. Resolution Process:
   • U.S. Bankruptcy provides a more flexible and debtor-friendly process, especially with Chapter 11 and Chapter 13, where the debtor can retain some control.
   • Indian IBC involves more active intervention by the courts and insolvency professionals, with timelines enforced to ensure quicker resolution (often within 180 days for corporate insolvency).
3. Outcome for Debtors:
   • In U.S. Chapter 7, debtors lose their assets but are discharged from debt. In Chapter 11, businesses get a chance to reorganize and continue operations. In Chapter 13, individuals can retain assets while working out a repayment plan.
   • In Indian IBC, businesses have a chance to reorganize under CIRP, but liquidation is the last resort. Individuals can be discharged after undergoing a repayment plan but typically have fewer chances of reorganization.

Conclusion

Understanding the intricacies of Chapter 7, Chapter 11, and Chapter 13 bankruptcies in the U.S. helps provide context for India’s Insolvency and Bankruptcy Code (IBC). While India’s IBC doesn’t follow the exact chapter-based structure of the U.S. Bankruptcy Code, the core objectives of resolving insolvency, protecting creditor interests, and offering debt relief to debtors are very much aligned. By fostering a fair and structured process for both businesses and individuals, India’s IBC serves a similar purpose as the U.S. bankruptcy laws, with a focus on quicker resolution and fresh financial starts for those facing insolvency.