What is the difference between filing bankruptcy under Chapter 7, under Chapter 13, and under Chapter 11 of the Bankruptcy Code?
This is a liquidation bankruptcy, sometimes called “straight bankruptcy”. The principle advantage is that the debtor comes out without any future obligations on his discharged debts. However, bankruptcy does not wipe out most mortgages or liens. If a debtor wants to keep an item (Ex: house or car) which is security for a loan, he/she must continue these payments. If the debtor wants to discharge that car loan, then he/she must surrender the car to the creditor that holds the lien.
The fact that the term liquidation is used in describing a chapter 7 can be misleading. A chapter 7 bankruptcy trustee can only liquidate nonexempt assets owned by the debtor. In Mississippi, most consumer chapter 7 filings are what we call no asset cases because the debtor owns no nonexempt assets or such a small amount of nonexempt assets that liquidating those assets would not provide a meaningful distribution to creditors. For an understanding of what is exempt and not exempt, see Exemptions in Mississippi.
A chapter 7 debtor is seeking a discharge of his obligations to pay his debts. However, bankruptcy does not discharge or wipe out most taxes, most school loans, child support or alimony (called domestic support obligations in the bankruptcy code) and some other debts. The key word is most taxes and most student loans (thus, a review of your situation to determine if your student loans or taxes can be discharged is important.) The ability to discharge such debts as taxes and student loans depends upon the age of the loan and numerous other factors. Thus, a complete review of each client’s debts must be made to determine what debts, if any, will remain after discharge.
Another type of debt that is not discharged is debt that is reaffirmed by the person filing the bankruptcy. Reaffirm and reaffirmation agreement are terms that are described in the Bankruptcy Glossary.
One of the primary reasons that people choose a chapter 7 bankruptcy if they qualify under bankruptcy law and if they can afford the monthly payments on the items that they want to keep is the fact that a person can bring his/her credit score up much more quickly than if that same person filed a chapter 13 case, because he/she completes the bankruptcy case so quickly. For more information about reestablishing credit after bankruptcy, see Bankruptcy and your Credit Rating.
In a Chapter 13 proceeding, the debtor must pay all or part of his debts from the future income over a period of three to five years through his chapter 13 plan. For some people, the time period must be five years. If the court approves the plan of payment, the debts will be paid in full or partially by the chapter 13 trustee. Most of the debt that is not paid as set forth by the plan of reorganization will be discharged or wiped out. In other words, if your plan only provides for payment of 10% of the unsecured debt, then the remaining 90% plus any accrued interest will be discharged or wiped out upon completion of your plan. If your plan provides for payment of no money to unsecured creditors, then the entire unsecured debt is discharged upon completion of the plan.
However, most long term debt and home mortgages must be paid in their normal monthly payments either through or outside the plan, except for the payments that were due upon the filing of the case. Example: If a person is behind by 3 payments at filing and the house note was $500.00 per month, then the $1,500.00 plus any late charges or other fees can be spread out through the plan. Upon completion of the plan, the long term debt will be current and the ongoing payments will continue.
The plan can be approved, if it proposes to pay the debtor’s disposable income over the life of the plan, even if the creditors do not agree with the plan. In most cases, the plan payment will be less than the combined payments of the debts prior to filing, and the debtor can retain all of his assets provided he makes the payments as required and maintains insurance on items, such as his home and car which are security for loans being paid through or outside of the plan.
To qualify as a debtor under chapter 13 of the Bankruptcy Code, the Debtor must be an individual or a husband and wife, filing jointly. There are also certain debt limits for debtors filing under chapter 13, which are explained under the description of chapter 11 cases below.
Chapter 11 is the chapter used by large businesses to reorganize their debts and continue operating. Corporations, partnerships, and limited liability companies cannot use chapter 13 to reorganize and must cease business operations if a chapter 7 bankruptcy is filed. Chapter 11 cases are by far the most complicated of bankruptcy cases, and as a result, there are very few law firms that handle chapter 11 cases, but many times individuals and companies cannot obtain the relief they need under chapter 7 or chapter 13, thus a chapter 11 is their best option.
Corporations, limited liability companies (LLCs) and partnerships are not allowed to file for relief under chapter 13, thus Chapter 11 would be the only option for these entities if the one of these types of companies needs to reorganize and continue its operations. If any of these types of entities files for relief under chapter 7, the company must end its operations upon the filing of the case.
Finally, if an individual or a husband a wife that are filing jointly have debt that exceeds certain limits, then chapter 13 reorganization is not an option. These limits change every three years in April base upon the change in the cost of living since the last change. Until April 1, 2016, an individual or husband and wife filing jointly must owe unsecured debt which is less than $383,175 and secured debt which is $1,149,525. If an individual or husband and wife filing jointly, debts exceed either of these limits, then the only option to reorganize is under chapter 11.
Chapter 12 is the chapter used by farmers or commercial fishermen to reorganize their debts and continue operating their farms or fishing operations. The advantage of Chapter 12 is the reorganization plan will allow payments to be made seasonally, when the farmer or fisherman earns his money. The limitation of only being able to restructure loans in a five year period in chapter 13 cases is not a limitation in chapter 11 or chapter 12 cases.
A corporation, limited liability company or partnership along with individuals are eligible for relief under chapter 12 as family farmers or family fishermen. There are debt limits for a debtor filing for relief under chapter 12, but the limits are significantly higher than the debt limits under chapter 13. The maximum limits between April 1, 2013 and March 31, 2016 are $4,031,575 for family farmers and $1,868,200.00 for family fishermen.