There are two main types of bankruptcy that consumers may file: Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, a persons non-exempt property is liquidated to pay back debts. Even if a liquidation does not generate enough money to pay back all of your debts, whatever unsecured debts that remain after liquidation are forgiven. The slate is wiped clean.
In Chapter 13 bankruptcy, a person s debt is reorganized for repayment. To be eligible for this type of bankruptcy, you must have a steady source of income from which you can make monthly payments to your creditors for the next 3 to 5 years. How much you have to pay back and what your monthly payments will be are determined by the bankruptcy court and based on things like how much money you owe, how much money your creditors would have received had you filed Chapter 7 bankruptcy, and how much you can afford to pay per month.
Chapter 13 is an alternative to Chapter 7 Bankruptcy, and is designed for individuals with regular income who want to pay their debts, but need some time to do so.
In addition to Chapter 7 filings, the Bankruptcy Code allows both consumer debtors and corporate debtors to file a petition seeking financial reorganization. Debt reorganization filings, such as Chapter 13 filings, have several benefits over Chapter 7 filings. A financial reorganization allows the debtor forgiveness of some of the debt while mandating a scheduled plan of repayment for the remainder of the debt.
When a human being selects this type of bankruptcy filing he or she files a Chapter 13 petition with the Bankruptcy Court. When a corporation of business entity selects this type of bankruptcy filing it files a Chapter 11 petition with the Bankruptcy Court. A business Chapter 11 filing differs from a Chapter 13 filed by an actual person in that the business reorganization proposal may call for both payments from sales of some business assets and payments using future business income. Stockholder interests must also be addressed by a business filing a Chapter 11. The plan may ask the court to restructure the stockholders' interests and modifying the company's obligation of payment on a stockholders secured and unsecured debts.
An individual person can file a chapter 11, but this should be done only in rare cases where there are many assets. The legal fees associated with the more complex Chapter 11 filings can be astounding!
This article focuses primarily on personal or Chapter 13 debt reorganization and alludes to Chapter 11 debt reorganization for comparison purposes only.
Exactly how much debt will be forgiven under a Chapter 13 repayment plan and how much debt must be repaid depends on the financial circumstances and ability to of the debtor to repay the debt. The repayment is generally classified in terms of percentage, for example 70, 80, 90, and 100percent forgiveness of unsecured debt. The remaining percentage is paid through a court ordered payment plan monitored by the court appointed trustee. The debtor's secured debt is generally monitored by the plan and must continue to be paid by the debtor. Primarily, this type of filing prevents the distribution and sale of many nonexempt assets such as consumer goods purchased with a credit card.
The draw back of a Chapter 13 filing, unlike a Chapter 7 filing, is that the debtor is required to follow a rigid repayment schedule making payments on both unsecured and secured debt for years to come. During this period of repayment, the bankruptcy proceeding remains open and it is often difficult for the debtor to get a credit card or even open a checking account!
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