Top 3 Types of Bankruptcy Chapters You Need To Know

August 29, 2018

Bankruptcy is essentially unchanging from state to state, but the federal government does oversee bankruptcy laws. This ensures uniformity and dictates how these specific laws are facilitated to keep the federal economic system running as it should.

If you’re considering bankruptcy, there are a few important legal changes and details to know. For example, there are three common types to consider; Chapter 7, 11, and 13. The main aim for each of these Chapters is helping people or businesses restructure and/or liquidate assets for debt relief.

To help you understand your financial options, let’s dive into each bankruptcy chapter a bit deeper.

What You Need To Know About Chapter 7 Bankruptcy

Bankruptcies mainly involve liquidation, which falls under Chapter 7. During bankruptcy liquidation, the trustee collects the non-exempt property of the debtor and converts it into cash. This is for the welfare of unsecured creditors.

“A Chapter 7 case allows the Debtor to liquidate (or wipe away) most unsecured debt, such as credit card bills, lines of credit, medical expenses, old utility bills, auto deficiencies, (balances owed after repossession) and auto accident judgments resulting in suspensions of a drivers license by obtaining a discharge of the debts,” David M. Offen, a Chapter 7 bankruptcy lawyer explained.

If a property is exempt or restricted to the point of not having equity beyond the exemption amount, the trustee will leave the asset. Leaving the asset or abandonment means that the bankruptcy estate would not sell assets or even take an interest in said assets.

If equity is available above the needed amount to get over the liens, and apart from exemption, the trustee will distribute the remaining funds to the creditors in a specific priority order under the state’s bankruptcy law, and the federal government rules.

Not every creditor receives the total amount owed via this process. In fact, in most cases, creditors receive nothing. After the completion of the liquidation, the bankruptcy court could discharge the remaining debts of the individual debtor to the extent that debts are considered dischargeable.

If a business is the debtor, that business will likely not exist after the liquidation and the distribution of assets. Business don’t get a discharge in Chapter 7 bankruptcy. But there could be strategic reasons for businesses to file for bankruptcy protection.

What You Need To Know About Chapter 11 Bankruptcy

Chapter 11 is a type of bankruptcy that’s available for both people and businesses. It is usually used by businesses to restructure and keep the business still in operation. Just like Chapter 13, this involves a reorganization of debt.

However, there is no limit to the amount of debt that can be restructured. There are a number of benefits if you file Chapter 11 bankruptcy for your business. These benefits include:

  • Your business would in most cases be able to stay up and running while under the supervision of the court, mainly for the benefit of creditors.
  • This allows your business to restructure and can result in more effective business operations that may lead to profitable outcomes.
  • A debtor typically can keep possession of assets during and after the filing of bankruptcy.

After successfully completing the payment plan scheduled by the Chapter 11 bankruptcy filing, you will be able to release the remaining debt. Business bankruptcy can be done in a variety of ways, but it simply depends on the situation.

There are cases when the court could appoint a trustee who can help in key business operations to ensure the court approved plan is followed.

What You Need To Know About Chapter 13 Bankruptcy

Chapter 13 bankruptcy is used for people who are able to pay off debt with a steady flow of income. For instance, you may want to pay off debt, but simply can’t at the current moment, leaving Chapter 13 as an option.

In some cases, Chapter 13 bankruptcy can be a better option than Chapter 7, since it allows the debtor to retain valuables, such as a home. The debtor could also arrange and schedule a plan that could be submitted to the Court. The plan should show how the debtor can pay creditors over a three to five year period.

If the Court approves the plan, the debtor is protected from actions by creditors such as lawsuits, contact and harassment, as well as wage garnishments. After the plan’s completion, the remaining debts are released.

What Bankruptcy Chapter Is Best For You?

Bankruptcy is not an easy situation, whether you’re an individual or business. The three most common types of bankruptcy serve different purposes, and to choose the right one for your situation, you should discuss options with a lawyer. How do you plan to tackle your debt?


Join the FREE Newsletter

Subscribe to more PF Advice and helpful tips straight to your inbox.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Leave a Reply

Your email address will not be published. Required fields are marked *