Bankruptcy is the legal process through which businesses or individuals seek the cancellation of their outstanding debts. It may involve liquidating or selling some of your assets to pay creditors. However, what happens to your assets depends on the form of bankruptcy you file.
Chapter 7 bankruptcy, also known as ‘liquidation bankruptcy,’ involves liquidating or selling most of your assets to pay creditors. Filing for a Chapter 7 allows you to dispose of your unsecured debts, including credit card balances. Essentially, it wipes out most of your debt without the need for a repayment plan.
Once you file a Chapter 7, the court appoints a trustee or an administrator to sell your assets and pay your creditors. However, the trustee will not sell everything you own. Both federal and state laws exempt certain assets.
If proceeds from the sale of your non-exempt assets are not enough to pay all your creditors, a Chapter 7 bankruptcy ‘forgives’ or discharges your remaining debt obligations. Filing for a Chapter 7 also stops all debt collection activities by creditors.
Chapter 13 bankruptcy is a ‘reorganization bankruptcy’ that allows individuals with a stable income to repay part of their debt over time. Filing for Chapter 13 helps you reorganize your finances by giving you a chance to catch up on financial obligations you might have missed.
Once you file a Chapter 13 bankruptcy, the court appoints a trustee with whom you must develop a debt repayment plan. Through the plan, you agree to let the trustee use a certain percentage of your future income to pay creditors.
Once the court approves the repayment plan, you must pay creditors over three to five years. Even though filing for a Chapter 13 allows you to keep all your assets, failure to adhere to the repayment plan can lead to the repossession of some assets like your car.
Chapter 11 bankruptcy is a ‘reorganization bankruptcy’ that allows businesses to repay their debts through a repayment plan. Essentially, Chapter 11 helps companies reorganize their finances while remaining operational and without interruptions from creditors. The objective is for them to become profitable and use part of the profits to pay creditors.
For a Chapter 11 bankruptcy, it is not a must for the court to appoint a trustee. When appointed, the trustee mostly supervises the organization’s debt repayment plan. The plan usually involves cost-cutting and developing new revenue channels for the business.
In addition to outlining how the business will pay its creditors, the plan may also direct how to pay preferred stockholders. While it is mostly for organizations, there are rare cases where individuals can also file for Chapter 11 bankruptcy.
While the various forms of bankruptcies are similar in some ways, there are some notable differences.
While Chapter 7 is a liquidation bankruptcy, both Chapter 13 and 11 are reorganization bankruptcies. Chapter 7 allows the sale of your assets to repay your debt obligations while Chapters 13 and 11 do not.
A Chapter 7 bankruptcy wipes out or disposes of your debt obligations without a repayment plan. Both Chapter 13 and 11 use a repayment plan to restructure your debt obligations, including giving you more time to pay creditors.
While both individuals and businesses can file for Chapter 7, only individuals, including sole proprietors, can file for a Chapter 13. Even though individuals can file for Chapter 11, it is mostly for businesses and large corporations.
In Chapter 7 bankruptcy, a trustee can sell all your non-exempt property to pay creditors. You keep all your property in both Chapter 13 and 11 bankruptcy.
Both Chapter 7 and Chapter 13 have income-level limits meaning you cannot file under them if your income is below or above a certain amount. Chapter 11 bankruptcy has no income-level requirements. While Chapter 13 limits the amount of money a debtor can owe, there are no such limits for a Chapter 11 bankruptcy.
A typical Chapter 7 bankruptcy takes approximately three to four months to complete, including the discharging of debt. A Chapter 13 repayment plan may take anywhere between three and five years. A Chapter 11 repayment plan can take as long as it is practical to repay the debt.
Once you file and get a discharge under Chapter 7, eight years must pass before you can file another Chapter 7. For a Chapter 13, you cannot file again for two years. However, the timings are different when the current and the previous filings are under different Chapters.