Although there are several chapters to the United States Bankruptcy Code, the two that pertain to most individuals and small businesses are chapters 7 and 13. There is good reason why bankruptcy is referred to as a “fresh start”. When a company or individual files for bankruptcy, they are in a state of insolvency. Unable to pay their debts, they require legal protection to relieve or restructure outstanding obligations.
Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation). Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances.
In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debts are legally discharged by the bankruptcy proceeding, but there are some types of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, income taxes less than 3 years old and property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor. Spousal support is likewise not covered by a bankruptcy filing nor are property settlements through divorce. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.
Of course, the above are only examples provided as general explanation of the bankruptcy process. Any individual considering bankruptcy should consult with an experienced attorney who is admitted to practice in the state in which the potential filer resides.
THE INFORMATION CONTAINED IN THIS POSTING IS FOR GENERAL INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. THE FURNISHING OF THIS INFORMATION DOES NOT CREATE AN ATTORNEY CLIENT RELATIONSHIP. AN ATTORNEY CLIENT RELATIONSHIP REQUIRES THE FURNISHING, REVIEW, AND SIGNING OF A RETAINER AGREEMENT.
There are six chapters, three of which most people have never heard of: 15 is a cross border (think international borders) case, 12 is for family farmers or fishermen, and 9 is for municipalities. The three you have probably heard of are 11 (reorganization), 13 (a wage earner's plan or 'mini' reorganization) and 7, which is liquidation.
Chapter 7 is a liquidation, wherein you turn your non-exempt assets over to a trustee, who sells them and pays your creditors. A summary of bankrupcty law is on the "Bankruptcy Basics" tab of my web site (www.oneylaw.com). Although bankruptcy is national law, some of the information on my web site pertains to the Massachusetts Bankruptcy Court, so you should consult a NY attorney for more information.
A bankruptcy filed under Chapter 7 of the Bankruptcy Code is a case in which the filer, who owes debts, discharges those debts without being forced to repay them. Chapter 7 is often referred to as "liquidation" because the filer's property may be taken by the trustee and sold (liquidated) and the proceeds used to pay some of the filer's debts.
Chapter 7 is, by far, the most common type of bankruptcy case. It is intended for impoverished individuals who are either without income, or who have very little income.
Federal laws are written in what are called “Titles”. Within each “Title” is a “Code”. Each Code has its own “Chapters” and within each “Chapters” are “Sections”.
It is sort of like a set of books. Each book has its own Title; within each book are Chapters and every Chapter has a paragraph (Section).
The law of bankruptcy is called “Title 11”.
The bankruptcy Code contains Chapter numbered 1,3,5,7,9,11,12,13 and 15. Chapters 2,4,6, and 10 are intentionally left blank for possible later use.
Each Chapter has its own description and purpose. Some Chapters describe definitions; others are the types of remedies available under Title 11.
Most people hear Chapter 11 because that is what is used to describe how a reorganization, usually a business is accomplished. The name for “Chapter 11”, is “Reorganization.”
“Chapter 7” is entitled “Liquidation.” In theory, all assets are liquidated and all debts are discharged. But since most people do not have assets as defined by the Code, they get to keep all of their property and “discharge” or eliminate their debts.
“Chapter 13” is entitled “Adjustment of Debts of An Individual with Regular Income”.
Most people file Chapter 13 to be able to repay arrears on a mortgage because unlike Chapter 7, Chapter 13 requires a plan to repay debts.
I hope that helps.
What’s the difference between the consumer bankruptcy debtor's popular options (Chapter 7 and Chapter 13 Bankruptcy)?
■Chapter 7 Bankruptcy is a quick (usually 3 month) process; you walk away from your debt without making any payments. If you have way too much stuff, then some things may be sold for repayment of (some) debt. That is rare; California exemptions (laws) protect the property (assets) of almost all persons who file chapter 7 bankruptcy. In chapter 7 bankruptcy, you may also be able to settle (pay an equivalent amount) instead of giving up an asset (if its value is excessive).
■Both low-income AND high-income debtors qualify for chapter 7 bankruptcy, though very-high income may compel you to file Chapter 13 Bankruptcy.
■Chapter 13 bankruptcy is a debt repayment plan. You make monthly payments for (usually) 36- to 60-mos. Most chapter 13 bankruptcy debtors end up paying pennies on the dollar for their debts; the unpaid-for debt balances gets canceled (discharged). Chapter 13 bankruptcy can also let you lower car payments and–get this… remove your second mortgage or equity line. Payments are suited to your budget and designed to be affordable.
Among existing chapters in the Bankruptcy Code (Title 11) there remain vacancies for chapters 2, 4, 6, 8, 10, 14. The occupied bankruptcy chapters are mainly odd-numbered– fitting for this rather odd business of bankruptcy. The open chapter-parking-spots provide for future bankruptcy needs of niche groups. Farmers and fishermen have already occupied even-numbered-Chapter 12: Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income (discrimination against fisherwomen is manifest in the Bankruptcy Code).
This answer (by San Diego bankruptcy attorney, Asaph Abrams) doesn’t address all facts & implications of the question; it’s general info, not legal advice to be relied upon and exceptions may apply. It creates no attorney-client relationship; it may be pertinent only to CA and/or its Southern District Bankruptcy Court in San Diego. It’s independent of other answers. It may be time sensitive, as in past the “Use by” date: laws and case law change. Hire a bankruptcy lawyer before acting or refraining from bankruptcy or other legal action.
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