Chapter 7 – Individuals
Generally speaking, if an individual is eligible to file a Chapter 7 bankruptcy case, the majority of their unsecured debts will be discharged, or eliminated, in the bankruptcy case, including but not limited to credit card debt, personal loans and medical bills. However, certain bills will not be discharged (or are very difficult to discharge), such as debt owed to the IRS, student loan debt, child support and alimony. With respect to secured debts, such as mortgages on homestead property and car loans, payments to these creditors must remain current if the debtor desires to keep the property. However, if a debtor wishes to surrender a home or car, they can do so with no future obligation to the creditor as the bankruptcy discharges the debt. In addition, while a Chapter 7 bankruptcy case affords many benefits, an individual is only permitted to retain those assets which are deemed exempt under applicable law.
A Chapter 11 bankruptcy case is available for businesses and certain individuals with financial challenges beyond what they can attain in a Chapter 13 case. During a Chapter 11 reorganization, a business continues to operate or an individual continues to manage their affairs under the supervision of the bankruptcy court. The business may be a corporation, partnership or sole proprietorship. A Chapter 11 bankruptcy case provides a myriad of opportunities for a debtor to restructure its debts and benefits that are not available outside of bankruptcy such as rejecting executory contracts, valuation of secured debt and the automatic stay to creditors’ actions to collect debts. However, timing is everything. The longer a struggling business or individual waits, the greater the risk that certain opportunities or benefits of a Chapter 11 reorganization may be lost. The goal of a Chapter 11 bankruptcy case is to have the a plan of reorganization, which is essentially a contract with creditors to repay creditors on more favorable terms than pre-bankruptcy, confirmed by the bankruptcy court. In the alternative, a Chapter 11 bankruptcy case may also be used to liquidate the assets of a debtor.
A Chapter 13 bankruptcy case is designed for individuals, not corporations or partnerships, who meet certain income and debt criteria. A Chapter 13 bankruptcy case allows an individual to reduce their unsecured debt through a payment plan over a three to five year period. It also allows debtors to retain certain assets which may otherwise be liquidated in a Chapter 7 bankruptcy case or to discharge certain debts which would not be discharged in a Chapter 7 case. Generally speaking, any unsecured debt that remains unpaid at the end of the payment plan is discharged, or eliminated, presuming that all plan payments were timely made. In addition, a Chapter 13 bankruptcy case is an attractive choice for individuals who have fallen into arrears on certain debts, such as mortgages, real estate taxes, child support or car loans because it allows them to force a repayment plan on creditors to repay the arrearages over time or, in some bankruptcy courts, to participate in mediation with the lender on their homestead property.