Types of Bankruptcy: Chapter 7, Chapter 11 and Chapter 13
There are three main types of bankruptcy cases. These are referred to by their chapter number in the bankruptcy code. Chapter 7, Chapter 11 (mainly for business) and Chapter 13. The bankruptcy code is federal, not state law, and bankruptcy cases are filed in the United States bankruptcy court, not in a state court. The most common types of cases for individuals are Chapter 7 and Chapter 13.
Liquidating Bankruptcy Chapter 7
A Chapter 7 is a liquidating bankruptcy. In return for having debts discharged, meaning the debtor is no longer legally obligated to pay them, the debtor must turn over certain property to the Chapter 7 bankruptcy trustee. The law allows the debtor to keep some property as exempt so the debtor can make a fresh start. In most Chapter 7 bankruptcy cases all property is exempt and so the debtor keeps all of the property. Those cases are sometimes called no asset in cases. If a debtor has more assets than can be exempted, the trustee sells the non-exempt property and distributes the proceeds to the creditors according to priorities established by law. Very often there is not enough money to pay for anything more than the cost of the administration, and so the creditors receive nothing.
Advantage of Chapter 7 Bankruptcy
The principal advantage of Chapter 7 bankruptcy is that the debtor emerges from bankruptcy without any future obligations on his or her discharge debts. Some debts cannot be discharged, for example debts incurred through fraud or debts for child support and alimony.
A Chapter 13 bankruptcy case is often used by individuals who want to catch up past due mortgages or car loan payments, and keep their assets. In Chapter 13 bankruptcy the debtor must propose in good faith to pay all or part of the debts from future income over a period of 3 to 5 years. If the court approves the plan, the debt may be settled in this manner, even if some creditors object to plan. If the debtor makes the required payments he or she will be able to keep his or her property. Chapter 13 can be a better choice than Chapter 7 for those that are behind on their home mortgage car loans as well as for other reasons. For instance, some of the debts that cannot be discharged in Chapter 7, can be discharged in Chapter 13. Also the debtor can pay some non-dischargeable Federal taxes over the term of the Chapter 13 plan without interest. Chapter 13 can only be used by an individual debtor, not by a corporation. An individual engaged in business not as a corporation, may chapter 13 to pay debts or settle them over a period of time while he or she continues to own and operate the business. However, Chapter 13 bankruptcy can be used only if the total debts owed are less than certain limits for secured and unsecured debts.
Bankruptcy Reorganization
Another type of bankruptcy case is a chapter 11 re-organization. It is generally used by businesses but can be used by individual debtors who do not qualify for Chapter 13 because their debts exceed the Chapter 13 limit.
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