Things you want to know but might be afraid to ask.
Why is there bankruptcy? Bankruptcy has been around for hundreds of years. It provides a fresh start, allowing bankruptcy clients to get back on their feet and contribute once again to the economy. Bankruptcy places all similar creditors on equal ground. It sometimes allows certain creditors to be repaid in part or in full, and allows businesses to reorganize.
Chapters of Bankruptcy:
Chapter 7 is the most common type of bankruptcy. It is a liquidation bankruptcy. Chapter 7 debtors must turn over their non-exempt assets to a bankruptcy trustee, who then sells them and pays the creditors according to certain priorities set by the Bankruptcy Code. Many individuals do not have any non-exempt assets, so they lose nothing. In exchange for turning over any non-exempt assets, clients receive a “discharge” of their debts. Chapter 7 has certain income limitations, so not everyone is eligible for this type of bankruptcy. However, the income limitations do not apply if more than half of a person’s debts are business-related.
Chapter 13 is reorganization type of bankruptcy for individuals or sole proprietorships, but not corporations. It is generally (but not always) used for people that do not qualify for Chapter 7. Under a Chapter 13 Plan, debtors pay their excess monthly disposable income to a Chapter 13 trustee for 3-5 years, after which most remaining debts are discharged. Chapter 13 has certain debt limits.
Chapter 11 is a larger scale reorganization for individuals or corporations. Usually, a trustee is not appointed, and the debtor is “Debtor in Possession.” Chapter 11 cases are more complex but also more flexible. Creditors must vote for the plan, which can extend beyond the 5-year maximum plan duration of Chapter 13.