Bankruptcy 101: Types of Bankruptcy, Ep. 2

Run time 4:09, Episode 2 of 8 Considering bankruptcy? This video is all about the different types of bankruptcy – Chapter 7, Chapter 13 and Chapter 11.


Types of bankruptcy

There are three main type of bankruptcy cases. These are referred to by their chapter number in the bankruptcy code. Chapter 7, Chapter 11 (mainly for businesses), and Chapter 13. The bankruptcy code is federal, not state, law and bankruptcy cases are filed in the United States Bankruptcy Court. Not in a state court. The most common types of cases for individuals are Chapter 7 and Chapter 13.

Chapter 7: Liquidating Bankruptcy

A chapter 7 is a liquidating bankruptcy in return for having debts discharged. Meaning the debtors no longer legally obligated to pay them. The debtor must turnover certain property to the Chapter 7 bankruptcy trustee. The law allows the debtor to keep some property as exempt so the debtor can make a fresh start. In most Chapter 7 cases, ALL property is exempt and so a debtor keeps all of the property. Those cases are sometimes called no-asset cases. If the debtor has more assets than can be exempted, the trustee sells the non-exempt property. Then distributes the proceeds to the creditors according to priorities established by law. Very often there is not enough money to pay for anything more than the cost of administration. So the creditors receive nothing. The principal advantage of chapter 7 is that the debtor emerges from bankruptcy without any future obligations on his or her discharge debts. Some debts cannot be discharged. For example, debts incurred through fraud or debts for child support and alimony.

Chapter 13: The “Home Saving/Car Saving” Chapter

A Chapter 13 case is often used by individuals who want to catch up past due mortgage or car loan payments and keep their assets. In Chapter 13, the debtor must propose in good faith to pay all or part of the debts from future income over a period of 3 to 5 years. If the court approves the plan, the debts may be settled in this manner even if some creditors object to the plan. If the debtor makes the required payments he or she will be able to keep his or her property. Chapter 13 can be a better choice than chapter 7 for those who are behind on their home mortgage or car loans as well as for other reasons. For instance, some of the debts that cannot be discharged in a Chapter 7 can be discharged in Chapter 13. Also, the debtor can pay some non-dischargeable federal taxes over the term of the Chapter 13 plan without interest. Chapter 13 can only be used by an individual debtor, not by a corporation. An individual engaged in business, not as a corporation, might use Chapter 13 to pay debts or settle them over a period of time. While he or she continues to own and operate the business. Chapter 13 can be used only if the total debt owed are less than certain limits for secured and unsecured debts.

Chapter 11: Reorganization (Mainly for Businesses)

Another type of bankruptcy case is a Chapter 11 reorganization. It is generally used by businesses but can be used by individual debtors who do not qualify for Chapter 13 because their debts exceed the Chapter 13 limit.

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