What Are Chapters 7, 11 & 13 Bankruptcy
There are several types of bankruptcy filings available to individuals. Each type of bankruptcy is referred to as a bankruptcy chapter because it is derived from a different chapter of the U.S. Bankruptcy Code.
If you are planning on filing for bankruptcy, you should have a basic understanding of your different bankruptcy chapter options. In addition, you should consult with a bankruptcy law firm about which type of bankruptcy is best for your needs.
Bankruptcy: Chapter 7
One of the most common types of bankruptcy filings for individuals is Chapter 7 bankruptcy.
Chapter 7 allows individuals to wipe away many of their debts and start anew. However, individuals may only file for Chapter 7 once every several years under most state laws. It also leaves a mark on your credit history for 10 years. During this time period, you will likely have much higher interest rates on car loans, home loans, and credit cards.
To initiate a Chapter 7 filing, you will need to fill out a Statement of Financial Affairs. This form requires you, the debtor, to list detailed information about your assets, debts, expenses, and income, as well as the names and addresses of your creditors. A creditor is someone or something you owe money to.
Next, you must liquidate your assets. In other words, much of your property will be sold off to help pay creditors for the debts you owe. However, not all assets will be collected. There are federal and, in some instances, state exemptions. The following are items that are usually exempted from liquidation:
- A house
- Professional tools or books
- Prescription health aids
- Social Security, veterans', workers' comp, disability, and unemployment benefits
To file for Chapter 7 bankruptcy, you will have to prove your eligibility. This practice became law as of 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). If you have questions about your eligibility, you should contact a Chapter 7 bankruptcy attorney.
Bankruptcy: Chapter 13
If you are not eligible to file for Chapter 7 bankruptcy, then Chapter 13 bankruptcy may be your only option.
Chapter 13 allows debtors to reorganize in order to make regular payments on their debts. Specifically, this process begins when you and your lawyer work together to draft a debt repayment plan. This plan should outline how you plan to repay your debts over a three- to five-year period. Specifically, the plan should outline how you plan on repaying your priority claims, such as your back taxes, in full.
Once the plan is drafted, it will need to be approved by a court-appointed trustee, as well as by your creditors. After that, you will begin making regular payments to the trustee. The money will be distributed to your creditors. If your payments are timely, then after the three- to five-year duration, a court will discharge most of your remaining debts. This means that you will no longer be liable for these debts.
Chapter 13 is for people who are unable to get out of debt but who earn a steady income. You also must have some amount of disposable income to put toward your debt repayments. If you do not have a regular income, then you should discuss filing Chapter 7 with your attorney.
Bankruptcy: Chapter 11
Although Chapter 11 is available to individuals, it is most often used by business entities. For individuals, Chapter 11 is usually used by those whose debt amounts exceed the statutory limits established for filing Chapter 13.
Chapter 11 is similar to Chapter 13 in that it also allows the debtor to reorganize. The debtor's reorganization plan must be approved by a majority of creditors before it can be enacted.
Chapter 11 is available to all business entities, whether it is a corporation or sole proprietorship. If you run a business or are ineligible to file for Chapter 13 and must declare bankruptcy, you should discuss with bankruptcy lawyers whether Chapter 11 is right for you.
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