Bankruptcy Chapters

There are four different kinds of bankruptcy cases, each with its own chapter in the bankruptcy code. They are: Chapter 7, Chapter 11, Chapter 12, and Chapter 13. Most consumer debtors use Chapter 7 or Chapter 13.

To understand the differences, we must first understand two important legal concepts: first, the difference between a secured debt and an unsecured debt; second, the difference between exempt and non-exempt property.

Bankruptcy addresses mostly unsecured debt; most secured debt is not affected.

Chapter 7 is the straight-forward liquidation — the simplest form of bankruptcy. Fundamentally, in a Chapter 7, the first thing we do is divide all your property into exempt property and non-exempt property. The exempt property is yours to keep (but you must pay any debts secured by that property). Exempt property, if any, is given to the Trustee, who sells it and distributes the proceeds to the unsecured creditors (called “liquidation”). A few months later, the court issues its Order of Discharge and you get your fresh start. (Not all debts can be discharged. You must pay debts secured by property you wish to keep — whether that property is exempt or not — and some special debts, such as student loans and most taxes, are not dischargeable even though they are unsecured.)

Chapter 13 is designed for wage-earners and others with regular income, and it makes most sense for those who are behind on installment loans secured by property they wish to keep, such as their homes or cars. The heart of a Chapter 13 bankruptcy is the Plan, during which the debtor makes monthly payments to the Trustee, who distributes the funds to the appropriate creditors. Through the Plan, the debtor pays the non-dischargeable debts and gets caught up on the late or missing payments for the house and car; then, at the end of the Plan, any remaining dischargeable debt is discharged and the debtor gets his or her Fresh Start. Typically, the debtor’s legal fees and court filing fees are also paid through the Plan, so in many cases, no up-front fees are required for a Chapter 13 bankruptcy – but it is much more expensive than a Chapter 7 case.

Chapter 11 is designed for corporate re-organizations, really, but it can be used by some individuals with complex cases. Most of the business bankruptcies that we read about in the paper and hear about on TV are Chapter 11 cases. Chapter 11 is much more complicated than the other chapters, and Chapter 11 cases are much more expensive B for example, the filing fee alone is a thousand dollars, over three times the others.

Chapter 12 is much like Chapter 13 but designed for, and limited to, family farmers and fishermen.