TYPES OF BANKRUPTCY

There are primarily three types of bankruptcy for individuals and small businesses (sole proprietors), Chapter 7, Chapter 13, and Chapter 11.

CHAPTER 7

In Chapter 7, a business or individual debtor obtains a discharge of all debts. A discharge is a court order releasing the debtor from his or her debts. In other words, the debt is wiped out and the debtor no longer owes the creditor any money.

A Bankruptcy Trustee [appointed by the court] determines if the debtor has assets to pay creditors or if the debtor has no assets to pay creditors.

Whether or not there are assets, the debtor will obtain a Chapter 7 discharge.  If there are assets that are non-exempt assets, the trustee will make a judgment of whether to sell those assets for the benefit of creditors.  Therefore, it is important that assets be properly exempted and that clients have an attorney when filing bankruptcy.

CHAPTER 13

In Chapter 13,  an individual debtor or small business owner, who is a sole proprietor, proposes and completes a plan to repay his or her creditors over three to five years. If the debtor is a corporation, the debtor must file either a Chapter 7 or Chapter 11. Chapter 13 will not be available to the corporate debtor.

The plan consolidates all of the debtor’s debts.  It will provide for regular monthly payments to a Chapter 13 Trustee who disburses the monthly payments and ensures the money is mailed to each creditor.

The court must approve of the Chapter 13 plan, and there are strict requirements for approval.

When a debtor has completed all payments called for by his or her Chapter 13 plan, then the debtor obtains a Chapter 13 discharge.   Read more about who may be a debtor in Chapter 13.

CHAPTER 11

Chapter 11 allows an individual or business (whether a small business or corporation)  to propose a plan of repayment for part or all debts owed to its creditors over an extended period of time.  In the alternative, the plan may propose liquidation whereby the business sells all of its assets to repay creditors.

In Chapter 11, creditors must vote and approve the plan, and the court must approve the plan.  Therefore, if there is a choice, an individual debtor or sole proprietor will want to favor a Chapter 13 filing rather than Chapter 11.

The primary benefit of a Chapter 11 for a business is that the business may continue to operate during the course of the Chapter 11 pending approval of the Chapter 11 Plan.