Bankruptcy is confusing, and many people don’t understand the different options available. One of the most common questions asked is
- “What is the difference between the types of bankruptcy?“
There are actually two types: reorganization/repayment plans and liquidation/straight cases. When people ask about the different types, what they usually mean is
- “What is the difference between Chapter 7 and Chapter 13?” These are the two kinds that apply to most consumers, regular people like you and me.
Chapter 9, Chapter 11, Chapter 13 and Chapter 13 are all reorganizations that provides for a repayment plan of some or all of a person’s debt. Reorganization requires that you have enough income to pay regular and ongoing expenses, plus have some left to make plan payments.
Chapter 9 is for cities.
Chapter 11 is for corporations or for individuals who owe a lot more money than most people do, so usually it isn’t for “regular people”.
Chapter 12 is for farmers.
Chapter 13 reorganization is a repayment case that is normally considered by most consumers. A big misconception is that people in a Chapter 13 have to repay everything. What you repay depends on several factors, like what your assets are worth, what secured (debts with collateral) and priority (like taxes and child support) claims you must pay, and what you can afford to pay after paying for your regular living expenses.
- Chapter 13 isn’t always a full repayment plan, and it may reduce substantially what is paid to certain creditors like credit cards and medical bills.
This option sets affordable monthly payments, allowing the individual to balance their budget and settle their debts.
In general, Chapter 13 debtors pay what they can afford to pay to their unsecured creditors, after they have paid their living expenses. Chapter 13 can also help keep cars, stop foreclosures, and give people up to five years to catch up missed mortgage payments and pay off other debts.
Chapter 7 is not a repayment plan. It is known as a liquidation or straight bankruptcy case.
In Chapter 7, you “throw in the towel” and walk away from your unsecured debts. Chapter 7 debtors don’t have any money left over after paying for their ongoing living expenses, so they don’t have money to make a payment in Chapter 13.
In exchange, Chapter 7 debtors give up property, but they get to keep some. What they get to keep is property that is protected by state or federal law, or using legal language: exempt.
- You do not lose everything if you file for bankruptcy, either Chapter 7 or Chapter 13.
For many people, all their property is exempt. Chapter 7 debtors often get to keep their homes, cars and all or a lot of their personal property. Laws vary from state to state, but don’t assume that you will loose all your property if you file for bankruptcy.
The best way to understand the differences between the types of cases and how they affect you is to consult a lawyer near you who can explain how you would be helped, and whether or not it is an option you should consider.
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Last modified: October 14, 2011