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Bankrupcty: Chapter 7, 11, or 13? Which One is for Me?

Posted by attorney Douglas Burnett


Chapter 7 is available to both individuals and businesses. A bankruptcy filing under Chapter 7 of the Bankruptcy Code is often referred to as “liquidation." This is because the filer’s non-exempt assets are converted to cash and used to pay creditors. Subsequently, the filer receives a discharge, even if certain creditors are not fully paid. The assets that are exempt from this process include a home,vehicles, retirement plans, certain personal property, and other property interests. In over 90 % of Chapter 7 filings by individuals, no property is ever “liquidated." There are limitations on discharges and on exempt property, and usually mortgages, other types of liens, and student loans will survive the process. Chapter 7 can eliminate medical bills, credit card debt, business debts, and other dischargeable unsecured debts.


A bankruptcy filing under Chapter 13 is often referred to as “reorganization." The filer will usually keep all of his or her property and will pay back debts in monthly payments according to a plan. The payment period is three to five years. At the end of the payment period, the filer receives a discharge of certain remaining debts. There are limitations on discharges, and other conditionsapply in a Chapter 13 Bankruptcy. Chapter 13 is available to individuals and to businesses that operate as a sole proprietorship.


Chapter 11 Bankruptcy is also a reorganization form of bankruptcy. It is available to corporations, limited liability companies, partnerships, and individuals. It is mostly used by businesses that need to decrease the impact of their debts so that they can operate more efficiently going forward. Individuals use Chapter 11 when they do not meet the debt limits imposed by Chapter 13 ($360,475 of unsecured debt and $1,081,400 of secured debt). When a business files for Chapter 11, its management is usually left intact and continues to operate the business during and after the bankruptcy. The general goal of a Chapter 11 Bankruptcy is to put forward a plan of reorganization that will be approved by creditors, or if necessary, to put forth a plan that will be approved by certain creditors and that can be “crammed down" on the other creditors. Chapter 11 is the most flexible of the available bankruptcy chapters, but it is also the most complex.

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