Common Types of Consumer Bankruptcy Explained

Table Of Contents

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a liquidation bankruptcy. Chapter 7 bankruptcy eliminates most unsecured debts. Unsecured debts include credit card balances, medical bills, and personal loans. A bankruptcy trustee oversees the Chapter 7 bankruptcy process. The bankruptcy trustee sells non-exempt assets. The bankruptcy trustee distributes proceeds to creditors. Most Chapter 7 filers retain all their property. Exempt property includes a primary residence (up to a certain value) and a vehicle (up to a certain value). Chapter 7 bankruptcy offers a fresh financial start.
Chapter 7 bankruptcy has specific eligibility requirements. An individual's income must fall below the state's median income for a household of a similar size. The income test is called the means test. Individuals with higher incomes sometimes qualify for Chapter 7 bankruptcy. Chapter 7 bankruptcy happens if significant allowable expenses reduce the individual's disposable income. A debtor completes credit counselling before filing. A debtor also completes a debtor education course after filing. Chapter 7 bankruptcy remains on a credit report for ten years.

How Does Chapter 7 Bankruptcy Work?

Chapter 7 bankruptcy works by discharging eligible debts. The debtor files a petition with the bankruptcy court. The petition lists assets, liabilities, income, and expenses. An automatic stay immediately takes effect. The automatic stay stops most collection actions. Creditors cannot contact the debtor. Creditors cannot pursue lawsuits. Creditors cannot repossess property during the automatic stay. A meeting of creditors (341 meeting) occurs approximately one month after filing. The debtor attends the 341 meeting. The bankruptcy trustee and creditors ask questions at the 341 meeting.
The bankruptcy trustee reviews the debtor's financial documents. The bankruptcy trustee identifies non-exempt assets. The bankruptcy trustee uses the proceeds to pay creditors. Most Chapter 7 cases are "no-asset" cases. No-asset cases mean the debtor has no non-exempt property. The court issues a discharge order typically 60-90 days after the 341 meeting. The discharge order legally releases the debtor from personal liability for dischargeable debts. Some debts are not dischargeable. Non-dischargeable debts include most student loans, certain taxes, and child support.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a reorganisation bankruptcy. Chapter 13 bankruptcy allows individuals with regular income to repay debts over three to five years. A payment plan is central to Chapter 13 bankruptcy. The debtor proposes a payment plan to the court. The payment plan outlines how the debtor repays creditors. Chapter 13 bankruptcy protects assets. The debtor retains all property in Chapter 13 bankruptcy. Chapter 13 bankruptcy is suitable for debtors who do not qualify for Chapter 7. Chapter 13 bankruptcy is also suitable for debtors who want to save their home from foreclosure.
Chapter 13 bankruptcy has debt limits. An individual's secured debt cannot exceed a certain amount. An individual's unsecured debt cannot exceed a certain amount. These limits change periodically. The debtor makes regular payments to a Chapter 13 trustee. The Chapter 13 trustee distributes funds to creditors. The debtor completes a credit counselling course. The debtor completes a debtor education course. This is less than Chapter 7 bankruptcy.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 bankruptcy works through a court-approved repayment plan. The petition includes a proposed repayment plan. The repayment plan details monthly payments to creditors. The debtor attends a meeting of creditors. The Chapter 13 trustee and creditors review the plan. The court must confirm the repayment plan. The repayment plan must meet specific legal requirements. The debtor begins making plan payments soon after filing.
The Chapter 13 trustee collects payments from the debtor. The Chapter 13 trustee disburses payments to creditors. The repayment plan typically lasts three to five years. The debtor receives a discharge after completing all plan payments. The discharge eliminates remaining eligible debts. Chapter 13 bankruptcy can stop foreclosure proceedings. Chapter 13 bankruptcy allows the debtor to catch up on mortgage arrears. Chapter 13 bankruptcy allows the debtor to repay priority debts like certain taxes.

What Is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is primarily for businesses. Chapter 11 bankruptcy allows businesses to reorganise their financial affairs. Chapter 11 bankruptcy also allows individuals with very high debts to reorganise. Chapter 11 bankruptcy is more complex than Chapter 7 or Chapter 13. Chapter 11 bankruptcy is also more expensive. A Chapter 11 debtor remains in possession of assets. The debtor operates the business during Chapter 11 bankruptcy. The debtor proposes a reorganisation plan.
The reorganisation plan outlines how the business repays creditors. Creditors vote on the reorganisation plan. The court must confirm the reorganisation plan. Chapter 11 bankruptcy aims to keep the business operational. Chapter 11 bankruptcy aims to preserve jobs. Chapter 11 bankruptcy provides a framework for debt restructuring. Chapter 11 bankruptcy is a powerful tool for complex financial situations.

When Is Chapter 11 Bankruptcy Used by Individuals?

Chapter 11 bankruptcy is used by individuals when their debts exceed Chapter 13 limits. Chapter 13 bankruptcy has specific debt ceilings. Individuals with very substantial secured or unsecured debts cannot file Chapter 13. Chapter 11 provides a reorganisation option for these high-debt individuals. The individual debtor proposes a plan of reorganisation. The plan details how the individual repays creditors. The plan sometimes involves selling non-important assets.
The individual debtor maintains control over the individual debtor's assets. The individual debtor continues managing the individual debtor's financial affairs. Chapter 11 bankruptcy offers flexibility for complex financial structures. The Chapter 11 process is lengthy. The Chapter 11 process involves significant legal fees. Chapter 11 bankruptcy is a last resort for individuals. Chapter 11 bankruptcy is typically only considered when other options are unavailable.

FAQS

What is the main difference between Chapter 7 and Chapter 13 bankruptcy?

The main difference between Chapter 7 and Chapter 13 bankruptcy is the approach to debt. Chapter 7 bankruptcy liquidates non-exempt assets to pay debts. Chapter 13 bankruptcy involves a repayment plan over several years. Chapter 7 bankruptcy offers a quicker discharge. Chapter 13 bankruptcy allows debt reorganisation.

Which type of bankruptcy eliminates all debts?

No type of bankruptcy eliminates all debts. Chapter 7 bankruptcy discharges most unsecured debts. Chapter 13 bankruptcy discharges remaining eligible debts after plan completion. Certain debts are non-dischargeable in both Chapter 7 and Chapter 13. Non-dischargeable debts include child support and most student loans.

What is the role of a bankruptcy trustee?

The role of a bankruptcy trustee is to administer the bankruptcy case. In Chapter 7, the trustee sells non-exempt assets and distributes proceeds. In Chapter 13, the trustee collects payments from the debtor. The trustee distributes payments to creditors. The trustee makes sure compliance with bankruptcy law.

Does bankruptcy affect my ability to get credit in the future?

Yes, bankruptcy affects your ability to get credit in the future. Bankruptcy remains on your credit report for a period. Chapter 7 bankruptcy remains for ten years. Chapter 13 bankruptcy remains for seven years. It is more challenging to obtain new credit after bankruptcy.

Can I file for bankruptcy more than once?

Yes, you can file for bankruptcy more than once. There are specific waiting periods between bankruptcy filings. The waiting period depends on the type of bankruptcy previously filed. The waiting period also depends on the type of bankruptcy you wish to file again.

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