Bankruptcy: Chapters 7, 11, and 13

Are you familiar with the three most common types of bankruptcy?

The most common “chapters” (or types) in bankruptcy are Chapters 7, 11, and 13. A simple explanation of each chapter follows:

Chapter 7, straight liquidation: In a chapter 7 bankruptcy, the debtor’s assets are divided into two categories:

• Exempt: A debtor’s exempt assets are protected in whole or in part from being taken to pay creditors. For example, exemptions protect formal retirement accounts, Social Security benefits, home equity, and some personal property. The rules of exemption are a bit tricky – exemption can be capped at different levels based on state law, and eligibility for an exemption may also depend on how long the debtor has owned the asset.
• Nonexempt: The debtor’s nonexempt assets are sold, or liquidated, and the cash proceeds are given to the bankruptcy trustee for distribution to creditors (the trustee being an individual appointed by the court to oversee that process).

Chapter 11, business reorganization: Sometimes a business that’s in financial trouble will want to try to stay in business, rather than go through liquidation under Chapter 7. The bankruptcy court allows the company to stay in business and to remain in possession and control of its assets, while implementing a plan to repay creditors based on the debtor’s assets and income.

Chapter 13, wage earner bankruptcy: This form of bankruptcy is similar to a Chapter 11 reorganization, but is limited to wage earners or nonbusiness entities. An ordinary individual or married couple with regular income, whose unsecured debt isn’t outrageous, can file Chapter 13 and enter into a repayment plan very similar to the plan described for Chapter 11. 

Read more in our latest article. 

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