The Bankruptcy Code authorizes six different types of bankruptcies, but only four can be used by individuals. Each type of individual bankruptcy case is known by the chapter that defines it in the Bankruptcy Code: Chapter 7, Chapter 11, Chapter 12, and Chapter 13.
A Chapter 7 case is the most common type of individual bankruptcy case. Chapter 7 is available to individuals, to married couples, and to a spouse who files separately. Chapter 7 is an erase-your-debts-start-fresh bankruptcy case. It is formally known as a “liquidation” proceeding, because (in theory) everything the debtor owns is taken and sold to pay creditors. However, it is not very practical to take everything a person owns, and many state and federal laws protect the debtor’s property to the extent that only about one case in twenty pays anything to creditors in a Chapter 7. An average Chapter 7 case will take four to six months to complete.
A Chapter 11 case is called a “reorganization” proceeding, and is commonly used by corporations. Individuals file Chapter 11 because their debts exceed the limits for Chapter 13 bankruptcy. The bankruptcy trustee cannot take property from a Chapter 11 debtor. The debtor proposes a plan to repay debts, creditors vote whether to accept the plan, and ultimately the bankruptcy court orders a reorganization plan which binds all parties to the terms of the plan.
A Chapter 12 bankruptcy case is only available to family farmers who wish to reorganize their finances. Many provisions in Chapter 12 are similar to a Chapter 13.
In a Chapter 13 case the debtor pays what he can afford each month under a court-ordered repayment plan. Creditors are grouped together in debt priorities and paid according to the availability of monthly income. Creditors are paid between zero and 100% over three to five years. Chapter 13 is only available for individuals who have a regular income (Chapter 13 is also called a “Wage Earner’s Plan”), unsecured debt of less than $336,900, and secured debt of less than $1,010,650. The bankruptcy trustee cannot take property from the Chapter 13 debtor. Chapter 13 provides many advantages to Chapter 7, including the opportunity to reduce monthly vehicle payments and catch-up a delinquent mortgage.
The Bankruptcy Code offers four powerful types of bankruptcy cases to individuals. If you are struggling with debt, speak to an experienced bankruptcy attorney and discover how the Bankruptcy Code can help you reorganize or eliminate your debt headache.