Consumers and small business owners can choose from among several types of bankruptcy “chapters,” including Chapter 7, Chapter 11, Chapter 12, and Chapter 13, per the U.S. Bankruptcy Code.
CHAPTER 7 – is a “liquidation.” It is by far the most popular choice for individuals. It may also be used by corporations. However, despite the word liquidation, you will be able to keep personal and household property, including vehicles, up to certain limits. You may also be able to retain a home. With a Chapter 7 bankruptcy, you fully disclose your property, assets, debts and financial activities over the past several years. Your debts, with some exceptions, then are discharged (cancelled) by the Court. The timeline for a Chapter 7 case from start to finish is three to six months.
CHAPTER 13 – is a “reorganization.” This chapter is for individuals as well as sole proprietors and independent contractors, but not corporations. Note: An individual who owns a corporation or an LLC in order to operate a small business is also eligible to use Chapter 13 and can include all business debts for which they have personal liability. The case must be filed in the individual’s name, not the name of the business. With a Chapter 13 bankruptcy, you propose a three or five year plan during which time you make monthly payments based on your income and expenses to the Trustee who distributes this money to your creditors. Typically you must repay certain types of debts in full (such as child support arrearages) and some portion of your unsecured debt. If you successfully complete your plan, your remaining unsecured debt is discharged. Chapter 13 provides some remedies that aren’t available in Chapter 7, such as the opportunity to pay off missed mortgage payments over the life of the plan.
CHAPTER 11 – is a “reorganization” for businesses, i.e. corporations. While individuals may file under Chapter 11, it is generally not done due to significant legal fees. Moreover, many businesses that start out in Chapter 11 oftentimes end up in Chapter 7, liquidation.
CHAPTER 12 – is a “reorganization” program specially designed for owners of family farms.