There are three common types of bankruptcy for individuals provided for in the Bankruptcy Code. Choosing which type to file, or even to file at all, should only be done in consultation with an experienced bankruptcy attorney.
Chapter 7 is the traditional liquidation, or “straight bankruptcy. It is by far the most common case filed representing approximately 80 percent of all filings. A trustee is appointed to administer the assets for the benefit of the creditors. Once the petition is filed, all of the debtor=s assets become part of the bankruptcy estate. These assets are sold and the proceeds are distributed among the creditors. “Exempt” assets are retained by the debtor. Most Chapter 7 cases are no asset cases which means all the debtor’s assets have been exempted and there are no assets to distribute to creditors.
Chapter 13, also known as a wage earner’s plan or adjustment of debts, is a relatively simple reorganization. A plan is formulated which provides for monthly payments to creditors over a term of three to five years. These payments are submitted to a Court appointed Trustee who distributes the money to creditors according to the debtor=s plan. This plan is submitted to the Bankruptcy Court within 15 days of the filing of the petition and needs to be approved by the Court and the Trustee.
Chapter 13 is usually used when a problem or risk might be involved in a Chapter 7 bankruptcy. For example, if the debtor is behind on mortgage payments, Chapter 7 may only stall foreclosure for a short period of time. Chapter 13 allows the debtor to pay the arrearage over a three-five year period. In a similar fashion, Chapter 13 allows a debtor to pay taxes over as long as five years without penalties and interest.
Some debts that may not discharge in a Chapter 7 proceeding, such as debts to a former spouse in a divorce, will still be eliminated in a successful Chapter 13 plan. However, this power was severely restricted as a result of BAPCPA.
Additionally, persons with assets that might be lost in a Chapter 7 may wish to consider filing a Chapter 13, which provides for a plan to pay creditors in full. This allows the debtor to keep all assets.
The amount of the monthly plan in a Chapter 13 is determined by applying two tests: (1)The creditors must receive, over time, at least as much as they would receive if the debtor liquidated in a Chapter 7, and (2) during the life of the payment plan, all of the debtor=s net disposable income must go to creditors. A budget is prepared and submitted to the Court to determine the debtor=s net disposable income. Obviously, this can be a very subjective exercise.
Chapter 11 is a complicated financial reorganization typically used by large businesses; however, it is also available to individuals. A plan of reorganization is formulated usually within the first four months after the petition is filed. The plan provides for the satisfaction of creditor claims. The most common provisions for payments to creditors include: (1) installment payments to creditors, (2) issuance of stock for debt, or (3) the liquidation of assets.
