In Title 11 of the United States Code (the Federal Bankruptcy Code), there are four bankruptcy filings:
Chapter 7 – Liquidation
Chapter 11 – Reorganization
Chapter 12 – Adjustment of Debts of a Family Farmer with Regular Annual Income
Chapter 13 – Adjustment of Debts of an Individual with Regular Income
The filing generally depends on the person’s financial situation. Reportedly, the most common filing is Chapter 7. Companies, married couples and individuals are allowed to file Chapter 7.
A debtor filing Chapter 7 is essentially scrapping everything and starting over, hoping for a clean financial slate. Basically what happens is that once the filing is underway, an administrator or trustee is appointed to maneuver the sale of the debtor’s assets. This does not necessarily mean that everything the person owns is sold. Both federal and state laws allow for certain exemptions, meaning that the debtor might get to keep some property, such as his or her primary residence or personal items like clothing. Once the debtor’s assets are liquidated, the trustee pays certain creditors a portion of the money raised. Obviously, not all of the creditors receive money from the proceeds, so many of those financial obligations are “forgiven,” or discharged. Once someone has filed for bankruptcy under Chapter 7, he or she cannot file again for seven years, and debts that were not forgiven in a previous filing will not be discharged in the next filing.
It is important to note that there are certain debts for which the debtor will receive no forgiveness. Alimony, child support and taxes are not discharged under any bankruptcy filing, and student loans are seldom discharged (see this page for details). So, if a lot of your debt falls into these categories, you might be better off filing Chapter 13.
Chapter 12 and Chapter 13 are basically the same filing, except that Chapter 12 is for family farmers and Chapter 13 is for other individuals. As long as you have a steady, reliable income, less than $269,250 in unsecured debt and less than $807,750 in secured debt, you can file Chapter 13. Once the filing is made, the debtor is assigned a trustee. The debtor and trustee develop a proposal for a repayment plan. The court decides whether to accept or alter the plan or dictate another repayment plan altogether. Once the plan is decided upon, it can last anywhere from three to five years.
You may be wondering why someone would file for Chapter 12 or 13 instead of Chapter 7. There are a couple of reasons for this:
Under Chapter 12 and 13 filings, debtors do not have to liquidate their assets — they actually get to keep everything, not just the items that meet the legal exemption.
In most Chapter 12 and 13 cases, the debtor is repaying only a percentage of what he or she actually owes — sometimes as little as 30 cents to 50 cents on the dollar!
Chapter 11 bankruptcy is very similar to Chapter 13. The main difference is that there is no limit regarding the amount of money owed by the debtor. Originally only intended for large corporations, individuals can now file Chapter 11 as well.
Filing for bankruptcy is not to be taken lightly. It affects your credit rating for many years. The decision to file is best made under the counsel of a financial planner and/or a legal representative.