When you file bankruptcy, you can choose the kind of bankruptcy that best meets your needs. Here is a brief outline. Additional information can be found under General Bankruptcy Information below.
- Chapter 7 - a Trustee is appointed to take over your property. Any property of value will be sold or turned into money to pay your creditors. You may be able to keep some personal items and possibly real estate depending on the law of the state where you live.
- Chapter 11 - this is used mostly by businesses, but individuals may take advantage of this. In Chapter 11, you may continue to operate your business, but the creditors and the court must approve a plan of reorganization.
- Chapter 13 - You can usually keep your property, but you must earn wages or have some othe5r source of regular income and you must agree to pay part of your income to the court who then pays your creditors.
General Bankruptcy Information
The purpose of Bankruptcy proceedings is to provide a "Fresh Start" to individuals who are unable to pay their bills. Individuals can find relief in Chapters 7, 11 or 13 of the Bankruptcy Act. We commonly refer to an individual who files a bankruptcy as a "Debtor". Business and other entities find relief in Chapter 7 or chapter 11. Generally, Chapter 11 and Chapter 13 cases are ways for the reorganization of assets and liabilities. Chapter 7 cases discharge most unsecured debts and liquidate assets. Chapter 7 cases are sometimes referred to as "Straight Bankruptcy". All Bankruptcy cases begin with the filing of a Petition. Immediately upon the filing f a Petition an automatic Stay becomes effective and operates as an injunction to stop all creditor actions, such as repossessions, mortgage foreclosures, garnishments, wage assignments and communications from creditors. This can also include the sale of assets previously repossessed but not yet sold, such as an automobile.
Chapter 7 - Straight Bankruptcy
Chapter 7 cases are proceedings used by individuals to discharge or extinguish personal liability for debts, such as credit cards, medical and utility bills and other dischargeable unsecured debt. Unsecured debts, such as alimony, child support, criminal restitution and certain taxes are never dischargeable in Chapter 7. Also, it is possible that debts incurred through fraud or other bad acts, such as conversion, embezzlement, and willful or malicious injury to property may not be discharged.
Liquidation does not mean that your property is sold or taken away from you. In every Chapter 7 case a Chapter 7 Trustee is appointed to determine whether the case is a "No Asset Case" or an "Asset Case". Only in an "Asset Case" are assets liquidated and sold by the Chapter 7 Trustee. Assets or property are only liquidated or sold by the chapter 7 Trustee when the asset or property has non-exempt value, in excess of secured debt, which can be used to repay unsecured creditors. If you have Assets, but want to keep the property, you should consider filing a Chapter 13 bankruptcy.
In a Chapter 7, secured creditors, those holding liens or security interests in homes, cars, furniture or other collateral are treated differently that unsecured creditors. A Debtor has options with regard to secured creditors. The Debtor can "reaffirm" the debt. This means that the Debtor can keep the property and continue making payments towards the secured debt. By reaffirming a debt, personal liability for the debt remains, as if the Chapter 7 case had never been filed. A reaffirmation Agreement is voluntary, must be agreed upon by the creditor, must be in your best interest, and may be canceled anytime before the Court issues your discharge or within sixty (60) days after the agreement is filed with the court, whichever occurs first. Another option is to surrender the property to the secured creditor. This means that the Debtor gives the property back to the creditor and is allowed to eliminate the entirety of the debt through the Chapter 7 discharge process.
As in Chapter 13 case (described below) an individual may choose to file a Chapter 7 case for very specific reasons. For example, where there is only dischargeable debt and no ability to repay the debt. Or, where a car loan or home mortgage is in default or foreclosure and the owner is unable to pay the current payments and deficiency will exist after the collateral is sold. This would apply where the Debtor does not desire to keep their home.
Chapter 11 Reorganizations
Chapter 11 is a Bankruptcy proceeding used by business or individuals, who do not qualify for Chapter 13 relief to restructure and reorganize assets and liabilities. It is generally used by businesses who need assistance in developing a plan to restructure the existing debt while continuing to run the day to day business. Chapter 11(s) are time consuming for both Debtors and their attorneys. Chapter 11 Debtors must file monthly reports of cash receipts and disbursements and must assist their attorneys in the preparation of a Disclosure Statement and Plan. Generally, approval of the Plan is a 2 step process. First, the Disclosure Statement must be approved, then the Plan may be confirmed if a sufficient number of creditors vote the acceptance of the Plan. While it is a fully complex process, the relief provided by a Chapter 11 case could very often save a business lien liquidation.
Chapter 13 Plans
Chapter 13 is a proceeding for individuals, including self-employed individuals or sole proprietors, who have regular income from any source. The income may be from a salary, social security, retirement, or other income. It allows individuals to repay their debts, or portion of their debts, over a period of three (3) to five (5) years. In a chapter 13, secured creditors are those holding liens or security interests in homes, cars, furniture or other collateral. They may be repaid in full or in certain circumstances receive less. Unsecured creditors are those without liens or security interests. They may be paid wither in full or in part depending upon an individual's assets, income and expenses and ability to repay creditors.
An individual will choose to file a chapter 13 case for very specific reasons. For example, where a home mortgage is in default or foreclosure. If the homeowner is able to pay the current mortgage payment, then the beginning mortgage payment (which may not be reduced) is paid through the Chapter 13. The Chapter 13 plan will then provide for the repayment of the back mortgage notes at a reduced rate over a period of months. This allows the Debtor to keep his or her home. A Chapter 13 plan may also be used to repay nondischargeable debts such as alimony, child support, student loans or taxes, or to lower payments to creditors and to extend the period of repayment when creditors won't agree to the reduction or extension. Where an individual's assets have value in excess of outstanding liens which could be liquidated in a Chapter 7 case to repay creditors, a Chapter 13 plan can be used to repay to nonexempt equity to creditors over the plan term. An advantage of a chapter 13 when the Debtor has considerable equity to their home is that it allows the Debtor to keep their home.