What are the differences between the various chapters of bankruptcy?

One of the most common questions I am asked is “What type of bankruptcy should I file for?”  The answer to this is not cut and dry and depends largely on your specific financial circumstances.

In Title 11 of the United States Code (the Federal Bankruptcy Code), there are four bankruptcy filings:

• Chapter 7 - Liquidation
• Chapter 11 - Reorganization
• Chapter 12 - Adjustment of Debts of a Family Farmer with Regular Annual Income
• Chapter 13 - Adjustment of Debts of an Individual with Regular Income

Eligibility for Chapter 7 is contingent upon a means test, which determines whether you are financially able to repay the debts rather than discharge them.  It is a debt liquidation option that typically gives people a much quicker route to the discharge of their debts.  It is the most common form of bankruptcy because it offers a fresh start for individuals or businesses with no hope of repairing their current financial situation.

It is important to note that there are certain debts for which the debtor will not receive forgiveness.  Alimony, child support and some taxes are not discharged under any bankruptcy filing, and student loans are seldom discharged.

Chapter 11 bankruptcy is a debt reorganization plan used predominantly by businesses that are struggling to meet payroll, taxes and other expenses.  Filing for this type of bankruptcy allows your business to continue operating with legal protection against creditors.  This is done through the restructuring of debt and the creation of a payment plan.

Chapter 12 and Chapter 13 are basically the same filing, except that Chapter 12 is for family farmers and Chapter 13 is for other individuals.  It is a debt repayment or reorganization plan.  It is designed for individuals with regular incomes who cannot meet their creditor’s demands.  It is especially helpful if you have significant equity or large assets that you wish to keep.  Once the filing is made, the debtor is assigned a trustee.  The debtor and trustee develop a proposal for a repayment plan.  The court decides whether to accept or alter the plan or dictate another repayment plan altogether.  Once the plan is decided upon, it can last anywhere from three to five years.

You may be wondering why someone would file for Chapter 12 or 13 instead of Chapter 7.  There are a couple of reasons for this:

• Under Chapter 12 and 13 filings, debtors do not have to liquidate their assets -- they actually are able to keep everything, not just the items that meet the legal exemption.
• In most Chapter 12 and 13 cases, the debtor is repaying only a percentage of what he or she actually owes -- sometimes as little as 30 cents to 50 cents on the dollar!

I have the skill and experience to help you draft a plan that is both effective and reasonable. When you are in dire financial straits, you need a bankruptcy attorney who knows the law, knows the system and knows you. Contact me to schedule a free consultation, or call 818-347-5800.