Types of Bankruptcies
Our firm generally only handles chapter 7, 11, and 13 cases with an emphasis on consumer and small business Chapter 7 and Chapter 13. Chapter 11 is typically costly and can sometimes do more harm than good unless you have a mid size to large business.
The “Seven” Chapters of Bankruptcy
Technically there are only six official chapters of bankruptcy for petition purposes. However, the “seventh” chapter represents a combination of chapter 7 and chapter 13 and is unofficially known as a chapter 20. Read below for the differences in the chapters.
Common Chapters of Bankruptcy: Chapters 7, 11, 13, and “20”
Chapter 7: This is considered a liquidation bankruptcy. In general, you have a long list of exemptions of assets that you will get to keep and you will discharge other debts unless they are deemed to be non-dischargeable. Unlike a ch 11 or 13, there is no payment plan that you owe. This is a one time filing that takes about six months to complete.
- To qualify: You need to pass the means test (an average income for families of your size) and not have excess disposable income.
- What a chapter 7 is good for: Discharging unsecured debt and secured debt where you are not keeping the security (such as surrendering a vehicle or letting a house foreclose).
- What a chapter 7 is not good at: Saving secured assets that you wish to keep such as houses or cars.
Chapter 11: This is a repayment plan for business and individuals with more than 1.1 million in secured assets and/or 360k in unsecured assets. Chapter 11’s length can vary but focus on repayment over the relevant period.
- To qualify: Anyone can file that can propose a realistic repayment plan, however it is meant for high asset businesses and individuals.
- What a chapter 11 is good for: Saving secured assets or a business that wishes to continue to exist and function
- What a chapter 11 is not good at: Being cost effective, the fees are very high and only about 10% of businesses that enter a chapter 11 successfully complete it, most are forced involuntarily into chapter 7 or the creditors agree to settle
Chapter 13: This is a repayment plan for individuals with less than 1.1 million in secured assets and or less than $360k in secured assets. Chapter 13’s are generally a three to five year repayment plan.
- To qualify: Anyone can file provided they can propose a reasonable repayment plan and fall below the relevant debt limits
- What a chapter 13 is good for: Those who wish to save secured assets like a house or a vehicle or for those who do not qualify for chapter 7
- What a chapter 13 is not good at: Discharging unsecured debt unless you are able to get a near zero percent unsecured repayment plan approved
Chapter “20”: This is a combination of a chapter 7 followed by a chapter 13, hence chapter “20”.
- To qualify: For the chapter 7 portion you would need to pass the means test and positive disposable income test and then for the chapter 13 you would need to be able to propose a repayment plan that is feasible
- What a chapter 20 is good for: When you have a secured asset (usually a house) that you wish to keep but you have a large amount of unsecured debt. In a normal chapter 13, if your income goes up you pay more. If you file a chapter 7 first, even if your income goes up your chapter 13 payment should remain the same.
- What a chapter 20 is not good for: You will get a double hit on your credit and some courts and trustees do not like this technique so you may face some resistance. However, you have the right to do this if you desire, it makes sense to do this, and you pass the relevant tests.
Uncommon Chapters of Bankruptcy: Chapters 9, 12, and 15
Chapter 9: This chapter is for municipalities. This includes cities, towns, counties, school districts, and other similar entities.
Chapter 12: This chapter is for “family” farmers and fishermen. This is a repayment style bankruptcy like a chapter 11 or chapter 13 with three to five year repayment period.
Chapter 15: This chapter is for individuals and businesses where there are assets in multiple countries and require cooperation between a US Bankruptcy Court and a foreign Court or Courts. Accordingly, this is only used if there are significant assets in two or more countries.
