What is the difference between Chapter 7 bankruptcy, Chapter 11 bankruptcy and Chapter 13 bankruptcy?
There are two general forms of bankruptcy relief: (1) Liquidation and (2) Rehabilitation and Reorganization.
Chapter 7 bankruptcy is entitled, “Liquidation”. It is sometimes called, “Straight Bankruptcy.” In a Chapter 7 case, a trustee is appointed by the Court to collect and sell all non-exempt property (or “assets”) and thereafter distributes the proceeds to creditors. The bankruptcy filer (or the “debtor”) in return for turning over the non-exempt property receives a discharge from the Court, relieving the debtor of their debts and obligations. Typically, the debtor must demonstrate that it is “insolvent”, it lacks sufficient income to make payments to their creditors. The purpose of the discharge in a Chapter 7 case is to give the debtor a “fresh start”.
Typically, most Chapter 7 cases involve property that is exempt and therefore, most cases are called, “no asset cases.” In these cases, the debtors keep all of their assets and are discharged from all debts. Subsequent questions will deal with exceptions to a discharge.
Chapter 13 is a form of bankruptcy that is called an “Individual Reorganization”. In a chapter 13 case, creditors are paid from future earnings of the debtor, not from the property or assets of the debtor. A plan ranging from 3 to 5 years is filed with the court and once approved by the court, monthly payments are made to a Chapter 13 Trustee, who collects the payments and thereafter distributes monies to creditors. In Chapter 13, the debtor keeps all property and assets, whether exempt or non-exempt. Chapter 13 is limited to individuals with “regular income” who have unsecured (i.e. credit cards) debts of less than $100,000.00 and secured (i.e. mortgages and car loans) of up to $350,000.00.
Chapter 11 is similar to a Chapter 13 in that the debtor retains assets and makes payments to creditors out of future earnings. It is generally used by businesses, since Chapter 13 is limited to individuals only, but individuals with debts above the limits outlined above are ineligible for Chapter 13 relief and have to use Chapter 11. Therefore, you must be fairly wealthy or in business to utilize Chapter 11.
If I have to pay money, what is the advantage of a Chapter 13 Plan?
If you have non-exempt property or assets that you would lose in a Chapter 7 filing, filing for Chapter 13 will allow you to keep the property or asset, since creditors receive payments from “future earnings”, rather than from property. Chapter 13 plans allow you to repay the creditors without accruing interest. Therefore, a substantial saving in monthly payments are achieved. In addition, Chapter 13 allows you to repay mortgage arrears over the life of the plan and allow you to retain your home.