What Is Chapter 7, 11, 13 Bankruptcy Law?

January 15, 2012 by  Filed under: Bankruptcy 

Bankruptcy is available to debtors who have a large amount of debt that they cannot pay. Bankruptcy is a procedure that gives debtors a fresh start. While bankruptcy law is governed by the Bankruptcy Code, substantive rights are governed by applicable state law. Exemption laws vary by state and determine what property is protected from creditors.

Bankruptcy deals with liens, which is an interest in a debtor’s property obtained by a creditor (an encumbrance). Liens are obtained by voluntary grant by the debtor, judicial action by the creditor, or by statute due to the status of the particular creditor.

The most common types of bankruptcy filed are chapter 7 and chapter 13. While chapter 11 is not as common, it is worth considering if the debtor is a business entity that wishes to continue business. Chapter 7 cases are available to individuals, corporations, and partnerships. Essentially, almost anyone can file under chapter 7 except for railroad companies, banks, and certain companies. Chapter 13 cases are only available to individuals with a regular income. Chapter 11 cases are available to individuals and companies.

A chapter 7 debtor will not usually have to appear in court unless there is an objection. A chapter 13 debtor may appear before court when there is a plan confirmation hearing.

Chapter 7

In a chapter 7 case, a debtor is given a court-supervised way of selling your assets to pay your creditors. To be eligible for a chapter 7, the debtor’s income must be below the state minimum income level. A trustee is appointed to look after your “estate,” which contains all of your existing assets and prepetition debt. Prepetition debt is debt that exists at the time that a debtor files a petition for bankruptcy. Under certain sections of the Bankruptcy Code, there is property that is protected from being sold. Individuals can keep exempt property and all non-exempt property is liquidated with the proceeds distributed to creditors. This chapter of bankruptcy results in a discharge, giving the debtor a fresh start. A successful discharge eliminates all of the debtor’s unsecured debt. Unsecured debt includes credit card debt, personal loans, and utility and medical bills. Educational loans are not included unless the debtor can prove an undue hardship. Most cases, the debtor has no assets. Corporations and partnerships are not given a fresh start like individuals because of the ability to dissolve. This is why it is especially important for individuals to seek legal advice.

Chapter 13

In a chapter 13 case, a debtor must be an individual with a regular income, who wishes to keep his or her non-exempt property. To be eligible under chapter 13, the debtor must have unsecured and limited debt, secured debt limited to $1,784,000, and some form of regular income, such as a pension, trust fund, wages, or family member support. Chapter 13 is only available to individuals who has enough income to pay the creditors over a three or five-year period.

Here, the Code provides a court-supervised method for individuals to set up a payment plan with creditors over a three or five-year period. The payment plan includes prepetition debt only, which is existing debt at the time of the bankruptcy filing. The payment plan period is determined by the debtor’s monthly income. The debtor has the ability to retain his or her property while paying creditors with future earnings. To do so, identification of the property estate is necessary and the court cannot confirm the plan until the court knows the extent of the property of the estate. Creditors must confirm the payment plan and the court must approve the plan. If the payment plan cannot be confirmed, the case will be subject to chapter 7 liquidation. Additionally, in order to reach confirmation, the plan cannot pay less than what creditors would have received under chapter 7.

Chapter 11

In a chapter 11 case, the debtor can be an individual, business, or other entity. Chapter 11 provides the debtor a way to continue business and retain business property necessary to continue business by restructuring or reorganize the debtor’s debts. The payment plan includes preconfirmation debt only, which is existing debt at the time of the bankruptcy filing. To be successful, the debtor must be able to file a reorganization plan, obtain acceptance by creditors, and the court’s approval of the plan. If a reorganization plan cannot be agreed upon within 18 months or one and a half years, the debtor will proceed to chapter 7 liquidation. Debtor keeps its assets necessary to continue business and the debtor does not give up any property. In order to reach confirmation, the plan cannot pay less than what creditors would’ve received under chapter.

You should always seek legal advice before filing for bankruptcy.

This article is provided to you courtesy of legal advice.

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