The Differences in Chapter 7, 11 and Chapter 13 Bankruptcy

Bankruptcy is a highly complex process involving the collection and distribution of information and assets. Individuals and businesses will want to compare bankruptcy types to learn which is the best option for them. Consulting a bankruptcy attorney involves an assessment of the individual or company’s balance sheet and a discussion of Chapter 7 versus 11, or Chapter 7 versus 13.

The federal court system of the United States acknowledges three kinds of bankruptcy known as Chapter 7, Chapter 11, and Chapter 13. The role of the trustee may vary in each of the three types or chapters of bankruptcy and the kinds of debts will be evaluated in a discharged or non-discharged fashion. The types of bankruptcy available to an individual, business or corporation will also depend on many factors. In this Low Cost Legal Guide we will touch base on how to compare bankruptcy types.

The Bankruptcy Trustee’s Role

According to “Collier on Bankruptcy Taxation” (editors Myron M. Sheinfeld, ‎Fred T. Witt, ‎Milton B. Hyman), the assigned Chapter 7 bankruptcy trustee is responsible for the sale of assets, if required, and subsequent dissemination of information to the court and debt holders, and financial proceeds.

Comparatively, the trustee of these Chapter 11 case serves the business debtor.

In further contrast, the role of the bankruptcy trustee is minimized in a Chapter 13 bankruptcy. In this type of bankruptcy. The trustee typically does not assume an active role in the Chapter 13 process. However, because all bankruptcies involve a complex process, the U.S. Courts Trustee System may determine the need for a higher level of trustee involvement in a specific Chapter 13 bankruptcy.

Chapter 7: Individual or Personal Bankruptcy

A Chapter 7, or individual bankruptcy, is considered the most extreme bankruptcy form. The individual or business debtor must meet certain income parameters of the state in which he or she lives. These income parameters are known as the “Chapter 7 Means Test” If the state’s income threshold is not met, the debtor may usually pursue Chapter 13 bankruptcy.

Chapter 7 strictly oversees and regulates the process of the individual’s financial liquidation. In Chapter 7 personal bankruptcy, a high percentage or all of the individual’s unsecured debt is discharged by the court, with these exceptions:

  • Mortgage loans (a kind of lien or loan secured by the home, boat or another large asset)
  • Vehicle liens (a loan secured by a car, truck, or motorcycle)
  • Student loans
  • Child support

According to the editors of “How to File for Chapter 7 Bankruptcy” creditors often claim that other secured (or collateralized) loans, such as those made to purchase computer hardware or software, are not appropriately discharged in bankruptcy. Fortunately, most secured loans of this type are discharged in a Chapter 7 bankruptcy. Learn more about charge-offs during a bankruptcy.

Taxes and bankruptcy

Taxes owed by an individual or business require careful assessment. According to IRS, the rule-of-thumb regarding taxes owed involves the individual’s ability to claim that the taxes owed resulted from an “exception.”

Certainly, IRS states when an individual files for bankruptcy in 2013 but has not filed tax returns for taxes due more than three years earlier, he or she may not discharge the tax debt in bankruptcy.

Chapter 7 and business bankruptcy

In some cases, a company may use Chapter 7. The author of “Bankruptcy for Small Business Owners” explains that an owner or owner’s spouse may have committed the business to an untenable level of debt and may use the remedies available under Chapter 7. Of course, small business owners should consult with a bankruptcy attorney to determine the best bankruptcy remedy.

In a small business Chapter 7 bankruptcy, the company is typically unable to continue its operations. Depending upon the advice of the company’s bankruptcy trustee, the company may close its doors or stop operations. The company’s structure, e.g. corporation or partnership, is dissolved and the unsecured debts of the business are discharged in this form of bankruptcy.

Chapter 7 versus 11

Individuals or businesses without significant assets frequently use financial remedies offered by Chapter 7. The costs to file Chapter 7 versus 11 are significant. For example, the United States Bankruptcy Court, Northern District of California, shows that a Chapter 7 filing in 2013 costs $306, while a Chapter 11 filing costs $1,213. Individuals or businesses with significant assets and real property most frequently file under Chapter 11.

Chapter 7 versus 13

Chapter 13 bankruptcy is primarily used by individuals and is the least used bankruptcy type, according to IRS. In some ways, Chapter 13 is the inverse of Chapter 7 because the debtor does not seek discharge of debts in bankruptcy. Alternatively, he or she prepares and presents a proposal to the bankruptcy court with the promise to repay debts within three to five years.

Some debts are almost always discharged in a Chapter 7 bankruptcy case while others are almost never released. Knowing what type of bankruptcy is the best solution for an individual or business requires careful, thorough evaluation. Engaging a professional bankruptcy is often the best way to navigate the complex bankruptcy process.