When you are filing for bankruptcy, you can be sure that there will be a lot of numbers involved, like your income, the value of your assets, debts, and taxes just to name a few. But apart from these money matters, you also have to think another important number: the chapter of the bankruptcy code that your case may fall under.
There are six types of bankruptcies under the bankruptcy code: Chapter 7 or basic liquidation, Chapter 9 or municipal bankruptcy, Chapter 11 or reorganization (or sometimes rehabilitation) bankruptcy, Chapter 12 or rehabilitation or debt adjustment for farmers and fishermen, Chapter 13 or the “Wage Earner Bankruptcy”, and Chapter 15 or the foreign debtors bankruptcy.
The most common bankruptcy cases are filed under Chapter 7, 11, or 13, depending on whether the entity filing it is an individual or a business. It’s important to know the differences between these types of bankruptcies, and the general process of how to file bankruptcy. However, it’s also beneficial to know the basics of Chapter 7, 11, and 13, so you don’t get lost when you discuss matters with your lawyer. Here are a few details that you should take note of.
Chapter 7 Bankruptcy
This type of bankruptcy is also sometimes called “straight” bankruptcy. In a nutshell, you will be assigned a trustee who will handle the liquidation of all your non-exempt property assets. The proceeds from the sale of these assets will then be distributed to your creditors. There is no need to come up with a repayment plan, since the sale of the assets should (ideally) cover the total amount of your debts.
Chapter 7 bankruptcy is ideal for people who don’t have a regular income or a big enough income to pay their debts in regular installments. If, after evaluation by your attorney, it is determined that you are making too much money to qualify for a Chapter 7, you may be required to file a Chapter 13 bankruptcy instead.
Corporate businesses can also file for Chapter 7 bankruptcy as long as they have the assets to liquidate, but they are not entitled or qualified to receive a debt discharge, unlike private individuals. There are also some debts that are not allowed to be discharged, like student loans, child support, and certain taxes.
Chapter 11 Bankruptcy
This type of bankruptcy is normally for businesses and corporations, but it can also be used by individuals. What Chapter 11 bankruptcy does is restructure debts so that they can be paid back over a limited amount of time. During this period, the individual or the business will not be hounded by credit collection efforts.
The debtor and their bankruptcy counsel are usually given up to four months to develop a debt reorganization plan. In some cases, this period can be extended up to 12 to 18 months. This debt reorganization plan must then be approved by the court.
The main advantage of filing Chapter 11 bankruptcy is that, provided that there is no assigned trustee, the individual or business retains control of all assets during the specified period. This gives them time to negotiate payment plans with their creditors.
It should be noted that Chapter 11 can become quite complicated for individuals; an attorney should definitely be consulted in this case. Some small businesses may also be reverted to Chapter 7 if the court decides that the company may not survive after the bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 is similar to Chapter 11 in that the debtor and their counsel must file a debt reorganization or repayment plan, which should also be approved by the court. Creditors may object to the plan, and these objections must be settled before the court gives its approval. The repayment period for Chapter 13 bankruptcies is typically 3 to 5 years, during which regular payments must handed to the appointed trustees. The trustees will then handle the distribution of the payments to the creditors.
Most individuals who do not qualify for a Chapter 7 bankruptcy because they have a steady source of (sufficient) income are usually reverted to Chapter 13. There are also debtors who may find it more appealing to file for Chapter 13, since this enables them to keep all their assets and allows them to catch up on missed payments like house mortgages or car loans.
Once the payments are completed, you debts will be discharged, much like in a Chapter 7 filing. Similarly, there are non-dischargeable debts like alimony or child support.
These are the fundamentals of Chapter 7, 11, and 13 bankruptcies. Familiarizing yourself with these details will allow you and your attorney to develop the most suitable plan of action to quickly and efficiently manage your debts.