Differences between Chapter 7, 11, and 13 Bankruptcy
When you find yourself in a financial situation that got out of hand, filing for bankruptcy may be a solution, both if you are a business or an individual. Maybe secured debts like seizable assets got you overwhelmed. Perhaps it was unsecured creditors like credit card companies. Either way, filing for bankruptcy can help waive those away. But there are different types of bankruptcies, and the most common ones are Chapter 7, 11, and 13. How do you know which one you should file for?
Here is a short guide on how they work and what the differences are between them.
Understanding Bankruptcy
Bankruptcy basically means that you need help getting back on your feet. Filing for bankruptcy requires that you forfeit some of your property via asset liquidation. That is the process where your non-exempt assets are sold, and the proceeds are allocated to creditors.
But what happens next is entirely based on what kind of bankruptcy you file for. While Chapter 7, Chapter 11, and Chapter 11 bankruptcies all impact your credit, that does not mean that your debt is wiped out.
Chapter 7 Bankruptcy
Chapter 7 is a lot of times also called the liquidation bankruptcy. Individuals and businesses who get their estate liquidated under the Chapter’s code use it.
If you are ripe for Chapter 7, that means that you are beyond the point of reorganization and your saving grace is liquidation – selling your assets to pay off your creditors. The bankruptcy court will first appoint a trustee who keeps the process in check, ensuring you pay creditors in the correct order. That is known as the rule of “absolute priority.”
For instance, secured debts have priority over unsecured debt. So first, you pay off the secured debts. Loans issued by banks and other institutions are good examples of this kind of debt. Specific assets secure these loans, such as buildings and costly machinery. The remaining assets and cash left after paying off secured debts are pooled together and allocated to creditors with unsecured debt. Such creditors are shareholders with preferred stock, bondholders, and others.
Chapter 11
Chapter 11 is the most complicated bankruptcy method and usually the most costly. That is the main reason why businesses use it more than individuals.
A business that files for Chapter 11 bankruptcy can remain open and carry on with its operation while repairing its financial situation and paying off creditors. Personnel responsible for filing for bankruptcy in the name of the business can put forth the reorganization plan. The plan often includes regular reorganization tools, such as downsizing and strategies for reducing expenses. Just as with Chapter 7, Chapter 11 bankruptcy also sees the company get a court-appointed trustee.
There was a sleuth of Chapter 11 bankruptcies in recent times due to the coronavirus pandemic, with J. Crew and J.C. Penney both falling onto some more challenging times.
Chapter 13
This type of bankruptcy is available just to individuals with stable incomes. Chapter 13 also comes with debt limitations, and these change all the time. The current limits will be in place until 2022, and they are $1,257,850 in secured debt and $419,275 in secured debt.
Chapter 13 bankruptcy gets rid of qualified debt through a repayment plan over a three or five-year period. The filers can keep some of their assets, such as a real estate property or car. We also call it a ‘wage earner’s plan’ since it allows individuals to pay their trustee a monthly sum. The trustees then pay the filer’s creditors. The payback sum typically needs to be equivalent or more than what they would get under other bankruptcy processes.
The ‘wage earners’ bankruptcy is a good choice for those currently overwhelmed with debt but think they can pay it off in a responsible timeframe.
Key Differences Between Chapter 7, Chapter 11, and Chapter 13 Bankruptcy
A key difference lies in who benefits the most from these types of bankruptcies. While individuals and businesses usually use Chapter 7 and Chapter 13, only companies typically use Chapter 11.
And while all of these types of bankruptcies have a trustee involved, Chapter 11 does not require you to get one – it’s optional. And even then, they are not in charge of selling your assets to creditors. Instead, they supervise the assets while the business continues its operations. But that doesn’t mean you got your debt absolved. Instead, the restructuring just changes the terms of the debt. If the company fails to fulfill these new terms, it must file for Chapter 7 and liquidate.
And although both Chapter 11 and Chapter 13 have typical plans of 3 to 5 years, Chapter 11 can be extended, while Chapter 13 cannot.
How to Navigate Bankruptcy Successfully?
There are several factors to take into account when planning to file for bankruptcy. If you have found yourself in the wrong spot and are thinking about this step, contact an experienced attorney before filing. In-house lawyers at White, Jacobs and Associates can help you navigate your situation. Contact us today for a free consultation.