Bankruptcy Chapters for Individuals in a Nutshell

Bankruptcy is a financial tool that you are guaranteed by the United States Constitution.  There are different bankruptcy structures for different situations.  The different structures are defined in bankruptcy law as “Chapters.”  Individuals have three bankruptcy chapters available to them:

(1)   Chapter 7

(2)   Chapter 13

(3)   Chapter 11

Chapter 7 – Liquidation

Chapter 7 bankruptcy cases are the most common chapter for individuals.  Chapter 7 is sometimes referred to as a liquidation proceeding.  The Chapter 7 Trustee (an individual appointed to oversee the Chapter 7 case) has the power to sell property if it is not protected by an exemption.  California provides two sets of exemptions that individuals can use to protect their personal and real property. 

A Chapter 7 bankruptcy case with no unexempt assets typically lasts for three months.  Some cases are open for more than three months depending on different variables, such as the Trustee may research specific asset values, among other reasons.  Once the case has run its course the Court will issue a discharge of debt, which means that the individual no longer owes money on their debts.  Some debts are not discharged, such as student loans, most taxes, and spousal support or child support arrears. 

If Trustee is selling assets then the case will stay open longer before the Court issues a discharge.  Cases can be held open for a year or longer depending on the specific facts of the case.

Chapter 13 – Reorganization

Individuals who file Chapter 13 cases receive a similar discharge as those in Chapter 7 (additional debts not discharged in a Chapter 7 case may be discharged in the Chapter 13’s superdischarge).  A common misperception about Chapter 13 cases is that individuals are required to pay their debts back.  This stems from the fact that Chapter 13 debtors are making monthly payments to the Chapter 13 Trustee.  These payments usually go to secured creditors (car lenders, mortgage arrears), or to taxes that will not be discharged and/or to pay attorneys fees.

This Chapter can help individuals who have fallen behind on their mortgage payments, who are having difficulties with their car loans, have problem tax debt, and many other situations.  The case typically lasts from three to five years.  Many will close much earlier depending on how the case was set up and the claims filed. 

Chapter 11 – Reorganization

Individuals only file Chapter 11 when they do not qualify for Chapter 7 or Chapter 13.  Chapter 11 is more burdensome in terms of the tasks required by law.  Chapter 11 cases are for secured debts exceeding $1.1 million and unsecured debts exceeding $380,000 for individuals (approximate numbers as of May 2013), or for corporations or other shell entities that need to reorganize their debt obligations.

Common Elements:

In each Chapter an individual acts as a Trustee for the bankruptcy estate (in Chapter 11 proceedings the debtor normally acts as their own trustee).  One thing the Trustee does is to ensure that the bankruptcy case is in line with the bankruptcy law.

Also, in each Chapter the individual is required to attend a hearing called Meeting of Creditors.  The Meeting of Creditors is where the Trustee asks the individual questions under oath related to their bankruptcy schedules.