When dealing with bankruptcy, the terms Chapter 7, Chapter 11, and Chapter 13 are frequently used. But what do they mean, and which one is the most beneficial to utilize?
Do they have minimum requirements to be allowed to file them? It can be confusing, but most bankruptcy lawyers know the differences are quite varied and apply to much different circumstances.
Chapter 7
In Chapter 7, the debtor surrenders his/her Nonexempt property to a trustee who proceeds to liquidate the property and uses the gains to repay the owed debts.
In return, a variable amount of debt will be entirely forgiven. Nonexempt property includes expensive musical instruments not pertaining to the debtor’s profession, valuable collections, family heirlooms, cash or bank accounts, and additional vehicles or houses.
Exempt property, which includes vehicles whose worth is less than or equal to a predetermined value, necessary household items and clothing, jewelry whose worth is less than or equal to a predetermined value, tools necessary for a person’s trade or profession, and a portion of the equity that has been gained in a person’s primary home is not surrendered.
It is important to note that while certain items are exempt from the bankruptcy liquidation, creditors may still possess the right to reclaim property that is owed on.
Chapter 11
Chapter 11 is considered a course of rehabilitation and is used mostly by businesses. Under Chapter 11 regulations, the debtor keeps control of assets and continues to operate the day-to-day business.
The courts and lenders will negotiate a plan of repayment and the plan is voted on by creditors. If the creditors do not agree to the plan, additional mandates or requirements may be put in place that the debtor must comply with.
Chapter 13
Chapter 13 is very similar to Chapter 11 in that the debtor retains ownership of all his/her property and a repayment plan is created.
The key difference between Chapter 13 and Chapter 11 bankruptcies is that creditors do not have a say in Chapter 13 cases.
A repayment plan is agreed upon between the courts and the filer, who agrees to devote a portion of future earnings towards repaying the debt, usually over a three-to-five-year period.
The amount repaid and the repayment period depend on the value of the debtor’s property and the debtor’s total income and expenses.
If at the end of the repayment plan the debtor has made all the appropriate payments, the court will discharge all remaining debts.
However, if payments are not consistently made, the court will often dismiss the case and lenders will typically turn to state law remedies to reclaim the unpaid debt.
When deciding under which Chapter to file, it is important to remember that the courts must approve each filing first.
In Chapter 7, an amendment is present that requires the filer to pass a “means test” to be approved, requiring filers to be below a certain income level to be eligible.
Chapter 13 is only available to those individuals with regular income whose debts don’t exceed a certain limit.
In essence, if your income is low, Chapter 7 is available, and if your income is high, Chapter 13 is your best choice.
