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Chapters of Bankruptcy

Most cases of bankruptcy are filed to eliminate existing debts. If granted bankruptcy for an individual or business often does not have to pay unsecured debts acquired before filing for bankruptcy. Below are the three most common chapters of bankruptcy.

Chapter 7

This is the most common type of bankruptcy and involved liquidation of one’s assets. It involves a trustee who collects and sells nonexempt property of the debtor and then distributes those proceeds to creditors. This form of bankruptcy cannot eliminate many forms of debt, including recent taxes, alimony, student loans, criminal fines, child support, or debts from fraud.

Chapter 11

Those who qualify for Chapter 11 bankruptcy usually maintain possession of assets and continue to operate a business under the supervision of the court and a creditors committee. A reorganization plan is proposed by the debtor and subject to the approval of the creditors. If accepted by a majority of the creditors and the court that plan becomes binding to the debtor and creditors. Debts can be repaid through the sale of assets or through future income.

Chapter 13

This form of bankruptcy is most practical for debtors with a regular source of income, unsecured debt less than $336,900 and secured debt less than $1,010,650. The debtor will keep all property and schedule regular payments to a trustee, who will use distribute these payments to creditors for three to five years. Repayment plans will pay between 10 to 100 percent of the debt, depending on the types of debt and the debtor’s income.

Secured creditors will continue to receive regular payments separate from this plan, including those for secured mortgages. There are certain types of debt that can be eliminated through Chapter 13 bankruptcy that cannot be discharged though Chapter 7, including recent debt, criminal punishments, and debts from fraud. This chapter also helps to prevent foreclosures and repossession of property being paid with secured debt.

For a more complete discussion and history of U.S. Bankruptcy check out:

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