What are Chapters 7, 11 and 13?

     The rules for bankruptcy are in the Bankruptcy Code, which is a federal law.  The Code is found in Title 11 of the United States Code.  The Code has several chapters.  The most commonly used chapters are Chapter 7, Chapter 11 and Chapter 13.  Each of these chapters offer debtors a different set of options for dealing with their debts.

Chapter 7 bankruptcy

     Chapter 7 of the Bankruptcy Code contains the set of rules that a debtor can use to liquidate his or her financial affairs.   A Chapter 7 bankruptcy is sometimes called a “liquidation” or a “straight bankruptcy.”  A Chapter 7 bankruptcy is the simplest, easiest and least expensive way to declare bankruptcy.

     Individuals, corporations and partnerships are all eligible to file a Chapter 7 bankruptcy.  However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) may prevent people who have above-average incomes from filing a Chapter 7 bankruptcy.  They may have to file a Chapter 13 bankruptcy instead.  A potential debtor must satisfy the means test in order to file a Chapter 7 bankruptcy case.

     If a debtor files a Chapter 7 bankruptcy petition, the Bankruptcy Court will appoint a bankruptcy trustee to manage the bankruptcy.  The trustee is sometimes called a “panel trustee.”   The trustee’s job is to collect and sell all of the debtor’s property that is not mortgaged or exempt from creditors, and then to use any money from the sale to pay the creditors.

     At the end of this process, assuming all the rules have been followed and everything is in order, a debtor who is an individual will receive a discharge. The discharge means that the rest of his debts are forgiven, i.e. they are cancelled.

Chapter 11 bankruptcy

     Chapter 11 of the Bankruptcy Code contains the set of rules that allow businesses and individuals who have large debts to reorganize their financial affairs.   A Chapter 11 debtor must develop a reorganization plan that explains how the debts will be repaid over a period of time.   Creditors vote on whether to accept or reject the reorganization plan, which must also be approved by the Bankruptcy Court.

     If the plan of reorganization is approved, the debtor makes regular payments to the trustee in the amount stated in the plan, and the trustee uses this money to pay the creditors under the plan.

Chapter 13 bankruptcy

     Chapter 13 of the Bankruptcy Code contains the set of rules that allow individuals with regular incomes that are too high for a Chapter 7 bankruptcy to reorganize their financial affairs.  After filing the bankruptcy, they must propose a repayment plan that has to be approved by their creditors and the Bankruptcy Court.  Chapter 13 allows a debtor to keep his or her assets (property) by repaying creditors out of their future income over the next three to five years.  The plan of reorganization establishes how much will be paid to each creditor.  If the plan is approved, then the debtor makes a monthly payment to the Chapter 13 trustee, who distributes the funds to the creditors each month for a fee.  After all plan payments are completed, the debtor receives a discharge of most of his or her debts.