Bankruptcy is a legal tool provided to help Americans who struggle with debt to get out of a dangerous financial spiral and on the road to recovery. But while it’s often spoken of as one single concept, bankruptcy actually encompasses a range of paths known as chapters. These chapters have different rules and approaches to solving your debt problems. But their goal and many of their results are the same.
To help you choose the right chapter of bankruptcy for your personal situation, here’s a short guide to the most common. These are Chapter 7, Chapter 11, Chapter 12, and Chapter 13.
1. Chapter 7
Chapter 7 bankruptcy is what most people think of when they envision bankruptcy. This chapter is often called liquidation, or straight bankruptcy. This is the fastest route to bankruptcy, sometimes taking only a few months to complete and exit. The reduced time and legal complexity also usually means it’s the cheapest route.
The reason for this speed — and its associated lower cost — is that Chapter 7 bankruptcy is based on the liquidation of eligible assets as of a particular date and the payment of debts as of that same date. Dischargeable debts which aren’t covered by what’s gained from liquidating the debtor’s available assets are discharged and the case is closed. It’s a one-and-done bankruptcy.
The downside to liquidation bankruptcy is the liquidation element. You can exempt some assets based on published lists known as bankruptcy exemptions. The federal bankruptcy code and many states provide such lists. However, your assets are at the most risk when you opt for Chapter 7. You may not be able to exempt things like your primary home, vehicles, equipment, or bank accounts.
2. Chapter 11
You’ve likely heard of Chapter 11 bankruptcy in news about businesses having financial or operational problems. Known as reorganization bankruptcy, Chapter 11 is available to both business and individual debtors but rarely used by individuals. It’s more complex and expensive than most other routes open to individuals.
Chapter 11 provides a debtor with more control over their own financial future. They get the automatic protections of bankruptcy — like the stay against collections efforts — but their assets aren’t seized and sold. Instead, the debtor comes up with a reorganization plan to make structural changes that will put them in a position to pay back as much of their debt as possible over time. But the business can continue operating.
With business debtors, this reorganization often includes things like changing management, renegotiating some debts, closing unprofitable divisions, or shedding unnecessary assets or projects. Creditors have a say in whether the plan is accepted, and they may even be able to create their own reorganization plan if unsatisfied. This form of bankruptcy may be forced on a business, but it can also be a cooperative effort.
3. Chapter 12
One of the least-used bankruptcy methods is Chapter 12. This isn’t because it’s not useful. Rather, it’s because its availability is limited to family farmers or fishermen. Your income and sources of debt must qualify according to its specific rules.
Because of their unique business operations, farmers and fisherman may find Chapter 11 bankruptcy onerous and unnecessary. So Chapter 12 is structured similarly to Chapter 13, including a three or five year repayment plan. It also generally allows you to have more debt than some other chapters.
4. Chapter 13
Finally, there is Chapter 13, or repayment plan bankruptcy. As its name suggests, this chapter allows the debtor to pay their debts over time with an organized repayment plan. The term of the repayment is usually either three or five years, and remaining eligible debts are discharged at the end of that period. In addition to paying back prioritized debts, you often pay back more overall than under Chapter 7.
Commonly called a wage earner’s bankruptcy, this chapter is designed for debtors whose income is too high to qualify for one-time asset liquidation and those who may be able to keep assets that would be sold in Chapter 7. If you’re behind on mortgage payments, for example, Chapter 13 allows you to stave off foreclosure and instead bring those payments up-to-date so you can keep the house.
Where to Start
The right bankruptcy chapter will help you protect your assets while getting the best debt relief possible in your circumstances. Start by learning more about all the available routes and how they affect your particular financial situation by meeting with Siben & Siben LLP.
For nearly nine decades, our firm has served the people of New York with all their legal needs. We can help you understand your bankruptcy options and choose the method that will work best for your unique circumstances. Call today to make an appointment or find out more about these and other chapters.