Bankruptcy chapters

There are four kinds of bankruptcy proceedings that an individual debtor can file. They are referred to by the chapter of the federal Bankruptcy Code that describes them.

Chapter 7

Chapter 7 is the most common form of bankruptcy and is what most people think of when an individual files bankrutpcy. It is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities among creditors established in the Bankruptcy Code.

Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors and married couples get a discharge within 4-6 months of filing the case. If there are assets which are not exempt, the trustee takes control of those assets, sells them and pays creditors as much as the proceeds permit. Any wages the debtor earns after the case is begun are the kept by the debtor; the creditors have no claim on those earnings. The goal for individuals who file Chapter 7 is to free themselves of debt through a bankruptcy discharge. Although businesses normally do not receive a discharge, corporations and partnerships may use Chapter 7 to liquidate and close their business.

Chapter 11

Chapter 11 is a reorganization proceeding, typically used by corporations or partnerships. Individuals, especially those whose debts exceed the limits of Chapter 13, may file Chapter 11.

In Chapter 11, the debtor usually remains in possession of all assets and continues to operate any business, subject to the oversight of the court and the creditors committee. The chapter 11 debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization. Corporations, partnerships, and sole proprietors wishing to continue in business and reorganize their financial affairs may file Chapter 11. The debtor in Chapter 11 uses the plan to restructure their debts, either by reducing the amount paid on the debt or by extending the time to repay it. A Chapter 11 plan can also be used to liquidate all or a portion of a debtor’s assets.

Chapter 12

Chapter 12 is a simplified reorganization for family farmers or family fishermen, modeled after Chapter 13, where the debtor retains his property and pays creditors out of future income.

Family farmers or fishermen who receive more than half their income from their operations and whose debts come primarily from their business operations qualify for Chapter 12. These debtors seek to restructure their debts, either by reducing the debt or by extending the time to repay. A Chapter 12 plan can also be used to liquidate all or a portion of a debtor’s assets.

Chapter 13

Chapter 13 is a repayment plan for individuals with regular income and unsecured debt less than $360,475 and secured debt less than $1,081,400. The Chapter 13 debtor keeps all property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over up to 5 years. Repayment in Chapter 13 can range from 0% to 100% payment to unsecured creditors depending on the debtor’s income and the type of debt involved. Some types of debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a way for individuals to prevent foreclosures and repossessions. A Chapter 13 can be used to catch up missed payments on their secured debts. Chapter 13 is available for individuals with predictable income who want to reorganize their financial affairs. The debtor proposes a repayment plan that is reviewed and approved by the court. Only individuals and sole proprietors are eligible for Chapter 13. Business entities (other than sole proprietorships) such as corporations, limited liability companies and partnerships are not permitted to use file under this chapter. Chapter 13 is simpler and much less expensive than a Chapter 11.

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