There are three main types of bankruptcy cases.
These are referred to by their chapter number in the bankruptcy code;
chapter seven, chapter 11, and chapter 13. The bankruptcy code is federal,
not state law and bankruptcy cases are filed in the United States bankruptcy
court, not in a state court. The most common types of cases for
individuals are chapter seven and chapter 13. A chapter seven is a liquidating
bankruptcy. In return for having debts discharged, meaning the debtor
is no longer legally obligated to pay them, the debtor must turn over certain
property to the chapter seven bankruptcy trustee. The law allows the debtor to keep some property
as exempt so the debtor can make a fresh start. In most chapter seven
cases, all property is exempt and so the debtor keeps all of the property. Those
cases are sometimes called no asset cases. If a debtor has more assets
than can be exempted, the trustee sells the non-exempt property and
distributes the proceeds to the creditors according to priorities established
by law. Very often there is not enough money to pay for anything more
than the cost of administration and so the creditors receive nothing. The
principal advantage of chapter seven is that the debtor emerges from bankruptcy
without any future obligations on his or her discharged debts.
Some debts cannot be discharged, for example, debts incurred through
fraud or debts for child support and alimony. A chapter 13 case is often used by individuals
who want to catch up past due mortgage or car loan payments and keep
their assets. In chapter 13, the debtor must propose in good faith to pay all
or part of the debts from future income over a period of three to five
years. If the court approves the plan, the debts may be settled in this
manner even if some creditors object to the plan. If the debtor makes the
required payments, he or she will be able to keep his or her property.
Chapter 13 can be a better choice than chapter seven for those who are behind
on their home mortgage or their car loans as well as for other reasons. For
instance, some of the debts that cannot be discharged in a chapter seven
can be discharged in chapter 13. Also, the debtor can pay some non-dischargeable
federal taxes over the term of the chapter 13 plan without interest. Chapter 13 can only be used by an individual
debtor, not by a corporation. An individual engaged in business not as a
corporation might use chapter 13 to pay debts or settle them over a period
of time while he or she continues to own and operate the business. However,
chapter 13 can be used only if the total debts owed are less than certain
limits for secured and unsecured debts. Another type of bankruptcy case is
a chapter 11 reorganization. It is generally used by businesses, but can be
used by individual debtors who do not qualify for chapter 13 because their
debts exceed the chapter 13 limit.