Bankruptcy – Your Filing Options

Your Filing Options

Individuals may choose several different types of bankruptcy based upon the amount and nature of the debts, the exemptions available, and the types of assets they own. The different bankruptcies are named after the corresponding chapter in the code.

Chapter 7

Referred to as “straight” or “liquidation.” In a liquidation, the debtor turns all of their assets over to a trustee.

The trustee then liquidates (sells) all the assets and distributes the proceeds to the creditors. The person is then discharged of all debts, except those which cannot be discharged.

Bankruptcy Facts: Every state allows a debtor, even in a liquidation, to keep some small amount of property.

Creditors must look solely to the assets held by the trustee for payment. Creditors can’t come back later and try to collect their claims from the discharged debtor. A debtor can receive a Chapter 7 discharge once every seven years.

Chapter 11

A reorganization proceeding, usually involving corporate debtors. It’s also avail-able to individuals who have engaged in commercial enterprises. This chapter is used when the owner desires to stay in business, restructure existing debts, retain assets, and attempt to reorganize under court supervision.

Chapter 13

Debtors pay their debts through future income rather than liquidation of their current assets. This chapter usually allows the debtor to keep much of his or her property.

Under Chapter 13, the debtor presents a plan for repayment, which is reviewed by the trustee, the creditors, and the Bankruptcy Court.

Bankruptcy Facts: Chapter 13 is available to those debtors with unsecured debts (usually credit cards) less than $100,000, and secured debts less than $350,000 (home mortgages and car loans).

Over time, the plan must provide creditors with an amount at least equal to what they would receive under a Chapter 7 filing, and must be feasible based on the debtor’s income. If the plan is approved, the debtor makes payments to the trustee, who then pays the creditors. Plans usually run at least three years, and cannot run longer than five years.

While a debtor under Chapter 13 gets to keep much of his or her property, there are certain disadvantages:

Debtors remain under court supervision for the life of the plan (up to five years), and are forbidden to make new debts or sell assets without court permission.

Debtors who propose less than full payment to unsecured creditors will be forced to live on a budget for the life of the plan and pay all excess income to the creditors.

Even if the debtor pays all of the creditors in full, the bankruptcy will still appear on the debtor’s credit record.

If the debtor doesn’t complete the plan payments, then any creditor may petition to have the court convert the case to a Chapter 7 liquidation.