There are several forms of bankruptcy. Each is designed for individuals
and businesses in different financial situations.
Chapter 7 Bankruptcy, also known as
straight or liquidating bankruptcy, is the most popular bankruptcy and accounts for about 90 percent of all
bankruptcies. It erases all debts except those that are non-dischargeable.
Conversely, you’ll lose all your assets except those few assets
that are exempt.
You can file Chapter 7 as an individual or business. A corporation, partnership,
trust or any other entity may file Chapter 7.
When is Chapter 7 for you? If you have few non-exempt assets to lose, file
Chapter 7. The big advantage of Chapter 7 is that your debts are forever
extinguished. You start your life again debt-free.
Chapter 13, or the
wage-earner plan, lets you keep your assets but
does not discharge your debts. You instead repay your debts in part or in full over
three to five years.
Your repayment plan must pay creditors at least the amount they would receive
under Chapter 7. Priority creditors, including taxing authorities, are
usually fully paid. Secured creditors must receive an amount equal to
the fair market value of their collateral.
Chapter 13 is your remedy if you have non-exempt assets to save, such as
a home with a large equity. If you have no assets or only exempt assets,
then Chapter 13 probably isn’t your answer. Chapter 7 lets you keep
your exempt assets and fully eliminate your debts.
Chapter 11 is similar to Chapter 13 in that it also allows the debtor to
keep his or her property while arranging a repayment plan with creditors.
While a wage-earner plan is limited to employed individuals, Chapter 11
can be filed by any debtor. There is another important difference: Debtors
in Chapter 13 cannot owe over $250,000 in unsecured debt and $750,000
in secured debt.
There’s no debt limit with Chapter 11. Farmers file Chapter 12, which
is similar to Chapter 11.
Bankruptcies Can Be Converted
For example, a company may be involuntarily petitioned into Chapter 7 and
convert their case to Chapter 11. Or a company in Chapter 11 or wage-earner
in Chapter 13 may convert to Chapter 7.
This often happens when the debtor can’t negotiate a satisfactory
repayment plan or defaults on other bankruptcy obligations. It’s
important to select the right type of bankruptcy after consulting with
an experienced bankruptcy attorney.