Understanding the Chapters of Bankruptcy

While chapter 7 bankruptcy is the most common bankruptcy filing for individuals, few people know what the differences between Chapter 7 and Chapter 13 filings. In reality, there are actually four (4) possible bankruptcy filings for individuals:

Chapter 7: “Liquidation”

As the most common bankruptcy filing, Chapter 7 allows companies, married couples, and individuals liquidate their assets and essentially erase their debts. Once the entity, couple, or individual files for Chapter 7, a “trustee” is appointed to oversee and orchestrate the sale of assets. The resulting value from the sale of assets is then distributed to creditors. While not all creditors may receive any payment, and most will not receive full payment, the subject’s debts are then “forgiven”. While the idea of selling off all of one’s assets is an extreme step, there are certain asset exemptions for individuals including an individual’s primary residence, some automobiles, clothing, and other personal items. However, there are also some serious consequences to filing for Chapter 7. First, an individual can only file for Chapter 7 bankruptcy for every seven (7) years. Second, certain types of debts such as alimony, child support, taxes, and student loans are generally not “forgiven”. Finally, one’s credit score will almost definitely suffer substantially (although the exact effects can not be predicted).

Chapter 11: “Reorganization”

Chapter 11 filings are primarily filed by businesses. This avenue is usually only chosen by individuals when they have too much income to pass a Chapter 7 “means test” and too much debt to file Chapter 13. Choosing to file chapter 11 as an individual is a very serious decisions and should not be taken without verifying one’s ineligibility for Chapter 7 or 13 filings.

 Chapter 12: “Adjustment of Debts for Family Farmers”

As the title suggests, this filing is specially reserved for individuals who are “family farmers.” Otherwise the consequences basically mirror Chapter 13 filings, which is available for individuals who are not “family farmers.”

Chapter 13: “Adjustment of Debts for Individuals”

Chapter 13 is a more favorable option for individuals, but is only available if the individual meets certain criteria. Individuals are only eligible for Chapter 13 filings if he or she has a consistent income, less than $807,750 in secured debt, and less than $269,250 in unsecured debt. Rather than having to liquidate all of one’s assets, individuals filing for Chapter 13 work with the appointed “trustee” and create a “repayment plan” proposal. That proposal is then accepted or altered by the court. Once the court accepts a “repayment plan”, the individual must simply comply with the plan. While a Chapter 13 filing still negatively affects your credit score, it usually allows individuals to only repay a portion of their debt and keep their assets/belongings.