As a bankruptcy lawyer, I am often asked about the difference between different types of bankruptcy. Essentially, there are three different types of bankruptcy cases available for individuals and businesses: (1) Chapter 7; (2) Chapter 13; and (3) Chapter 11.
The most common type of bankruptcy is Chapter 7. Both individuals and businesses are eligible to file Chapter 7. However, only individuals are eligible to receive a discharge in Chapter 7. A discharge is a bankruptcy court order that absolves individuals of debts eligible for discharge.
To qualify for Chapter 7, a thorough analysis of assets, liabilities, income, expenses and financial affairs should be undertaken by an experienced bankruptcy lawyer. Since Chapter 7 is a "liquidation" bankruptcy, an individual or business may lose valuable assets if exemptions are not available to protect such assets. An exemption is a state or federal law that protects assets from creditors up to a certain dollar amount. For example, in Washington State the homestead exemption to protect equity in a primary residence is $125,000. This means that a primary residence will be liquidated in Chapter 7 only if the equity in the residence exceeds $125,000.
If all assets are deemed exempt, a Chapter 7 case can last between 80-100 days from the date of filing. Under federal bankruptcy law, a court date (called the Meeting of Creditors or 341 Meeting) is scheduled between 20-40 days after the filing date. In an individual case, the discharge order is entered by the bankruptcy court 60 days after the court date.
A Chapter 7 case is ideal for those who qualify and who are not in need of debt reorganization. For those who desire to reorganize debt such as a mortgage or auto loan, or who do not qualify for Chapter 7, a Chapter 13 can be an efficient means of repaying debt over 36 or 60 months. Although mortgage debt is not currently eligible for modification in a Chapter 13, junior liens such as 2nd mortgage loans and home equity lines of credit (HELOC) may be stripped and eliminated if such loans are unsecured. However, a Chapter 13 debtor must complete the Chapter 13 plan in order for the junior liens to be stripped and discharged.
Chapter 13 is also a good option for individuals who would like to repay tax debt or other non-dischargeable debt over time. Chapter 13 is NOT available for businesses.
A business or individual may file a Chapter 11. Chapter 11 may be a good option for individuals who's debt exceeds the Chapter 13 secured/unsecured debt limits. Chapter 11 may also be a good option for a business that needs to stave off a lawsuit, foreclosure or other collection action and has income sufficient to fund a Chapter 11 plan of reorginzation. Be careful, Chapter 11 cases are difficult to confirm and quite expensive to prosecute. Oftentimes, an out-of-court settlement agreement with a difficult creditor is preferable to rushing into bankruptcy court.
For more information on the different bankruptcy chapters as well as non-bankruptcy options, please feel free to contact us for a free consultation. We look forward to the opportunity of assisting you with gaining an understanding of the options available to you to resolve your debt problems.