Differences between Chapters 7, 11, 12, & 13

What is the difference between filing bankruptcy under Chapter 7, under Chapter 13, and under Chapter 11 of the Bankruptcy Code?

Chapter 7:

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.

Chapter 13:

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:

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:

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.

16 Comments

  1. Fabian
    Posted June 22, 2014 at 9:59 am | Permalink

    I owe money to the plaintiff. The plaintiff won the civil case and I owe them. Close to 7,200 dollars. I would like to know what bankruptcy chapter do i file?

  2. robert
    Posted February 18, 2015 at 6:01 am | Permalink

    Fabian,

    There is not enough information in your question to determine if you should file under chapter 7 or chapter 13.

    If all of your debt is unsecured, such as the $7,200 debt you mentioned plus credit card debt and medical debt, the chapter 7 would probably be best, provided your income and expenses qualify you for a chapter 7 case.

    If the judgment against you for the $7,200 has been enrolled in a manner set up in the state in which you live, then judgment probably shows up as a lien on any real property that you own in the county or parish where the judgment was enrolled. That is clearly what happens in Mississippi. In Mississippi, if the only real property you own is your homestead and the equity in your homestead is less than $75,000, then the lien can be avoided in a chapter 7 or chapter 13. If you own other land in the county in which the lien was enrolled such as a rental property or an empty lot, then the lien will survive the bankruptcy if you file chapter 7, but you can pay that creditor over time in a chapter 13 so that the lien is satisfied during the bankruptcy.

    There are many other scenarios that would be a factor in which chapter of the Bankruptcy Code would best suit your needs. Thus, your best option is to call a bankruptcy attorney near where you live and give him/her all the facts about your current financial situation. If you don’t know how to find a good bankruptcy attorney, check out one of these web sites for help: superlawyers.com; abcworld.org; or nacba.org.

  3. Posted February 23, 2015 at 3:59 pm | Permalink

    I have a question, I have a home in Georgia and I’m upside down. I’ve notified the mortgage company I would like a loan modification i.e. reduce the loan to the value of the home currently. I paid $170k and currently it’s worth $88k. this has been going on for the past 4yrs. I can’t sell my house because I’m upside down. My question is can I file bankruptcy for my home only? My other debt I’m willing to pay, no questions ask.

  4. robert
    Posted February 24, 2015 at 6:10 am | Permalink

    Your question can be answered by a qualified attorney in your area. I will supply a general answer but to give you an accurate answer, an attorney will be required to look at 1) your income and expenses for the past 6 months through the means test, 2) your projected income and expenses, 3) the value of all of your assets to determine if you have any non-exempt assets that a chapter 7 trustee would sell to convert to cash and use to pay his/her fees and expenses and to pay to the unsecured creditors. Any of these factors could result in you not qualifying for a chapter 7 or losing assets that you do not want to lose in a chapter 7. There are many other issues that must be determined before you make the determination to file a bankruptcy case under either chapter.

    If we assume that you qualify to file a chapter 7 bankruptcy petition and that you will not lose any assets to the chapter 7 trustee when a bankruptcy case is filed, the Bankruptcy Code requires that you give full disclosure. This means you are required to list all of your assets and list all of your debts, not just the debts that you want to discharge. However a bankruptcy debtor can reaffirm many of his/her debts, such as auto loans. Also, some debts such as child support or alimony, most student loans and most taxes are not discharged even though those debts are listed.

    Reaffirming other debts that you might want to keep paying such as credit card debts would not be allowed in the Northern District of Mississippi in most instances. However, any bankruptcy debtor can pay any debt that he wants to pay after discharge in a chapter 7 case whether the debt was reaffirmed or not. That may not be the best decision to make since paying the debt that was discharged will not help your credit score because the debt will show on your credit report as being included in the bankruptcy with no balance.

    There are ways to obtain new credit cards after receipt of a discharge. First, a person generally will be approved by some companies for low limit credit cards, generally around $300.00. Second, many companies offer secured credit cards. An internet search will reveal which companies will issue secured credit cards. Remember, that it is important not to max out any credit cards, because the amount of credit used in comparison with the credit limit will bring down a person’s credit score.

  5. John
    Posted February 25, 2015 at 8:56 pm | Permalink

    Does 5000.00 of debt qualify as enough to go bankrupt?

  6. robert
    Posted February 25, 2015 at 10:33 pm | Permalink

    John,

    There is no minimum amount of debt that a person must have to qualify to file a bankruptcy case. However, each person that considers filing must look at the cost of filing the bankruptcy versus the benefit to that person.

  7. rich
    Posted March 4, 2015 at 10:51 am | Permalink

    I am 6 payments behind on my mortgage, i lost my job and am unable to pay the amount, although i have an agreement with wells fargo to pay less it still affects my credit report and will for 7 years i believe? I also have 20,000 in credit card debt. Question is, if i am able to pay at least half of the credit card debt back now and continue to pay that down to 0 over the next 6 months and sell my house in the end i will have a credit report that shows all cards paid (or low balance) and mortgage paid but with those late months in there. If i did a bankruptcy how would it be different? Am i better off paying the cards yet having that mortgage kill me for 7 years on the report? essentially i am asking if filing bankruptcy will hurt me equally to my current situation …

  8. robert
    Posted March 6, 2015 at 4:45 am | Permalink

    Rich,

    There are too many moving parts to give you a definitive answer. Some of the questions that would need to be answered are: 1)will you have enough income from other sources to continue to pay your house note if you can catch up the payments, 2) is there a probability that your mortgage company will agree to modify your home mortgage reducing your payments, 3) what assets do you have that are exempt in your state and what assets do you have that are not exempt and 4) your income over the past 6 months, your current income and your projected income together with your projected expenses.

    In most instances, I would never recommend to my client to pay $10,000.00 on credit card debt instead of using that money to catch up a house note. However, if catching up the house note would only delay the inevitable, that being foreclosure, I probably would not recommend that either. With respect to credit, there are multiple factors that will need to be considered, including the potential for a foreclosure, default on the credit card and other debt, potential bankruptcy. Some people we talk to are at a point that filing a chapter 7 to get a fresh start and rebuild their credit is the best options while other clients will be better served by riding out their current situation.

    You need quality professional advise from an attorney in your state. In our office, we will give a prospective client a 1 to 1.5 hour free consultation with an attorney, reviewing his/her assets, debts, current income, and projected income (or the family’s current income and projected income) before giving advise on what to do. However, we can only do that for people that reside in Mississippi. If you live in another state, then go to superlawyers.com or abcworld.org to determine if you can find a consumer bankruptcy attorney in your area that would have the knowledge and expertise to assist you.

  9. Susy
    Posted March 6, 2015 at 7:12 pm | Permalink

    I am in currently in about 35000 in credit card debt, my husband lost his job and after going through the savings started using the credit cards. this was over a year ago. I’m over my head because I can’t seem to lower my debt ag all. I’m current in my mortgage payments. i recently applied for a home modification and was approved. I would like to get rid of the credit card payments because all my paycheck goes paying the minimum only and soon I won’t be able to afford food. I’m looking into going through bankrupcy but would like to keep my house. I own 2 cars which I finished paying already and don’t want to jeopordize the cars. I haven’t tried negotiating the debt with the companies yet. Should I try that first? . I live in Illinois. What would be the best recommendation?

  10. robert
    Posted March 7, 2015 at 8:22 am | Permalink

    Susy,

    The first thing that your attorney must determine is whether you qualify to file a chapter 7 case considering your income and expenses under the Means Test and considering your projected income and expenses.

    If you qualify and you are a resident of Mississippi and have been a resident for more than two years, you could file a chapter 7 and keep your home as long as you can the equity in the home is $75,000.00 or less and if you reaffirm your house mortgage and stay current on that debt. You would also be able to exempt up to $10,000.00 in personal property including autos, household goods, clothing, and numerous other items. If the assets are owned jointly with your husband, then your interest in the personal property would be 50% of its value.

    As an Illinois resident, your bankruptcy attorney will be required to consider Illinois exemptions. Since I am not licensed in Illinois and do not practice there, I do not keep up with Illinois exemptions. However, it appears that the homestead exemption is only $15,000.00, but can be doubled if you file jointly with your husband and you own the home jointly. It also appears that the exemption for an automobile can be used for only one vehicle and the exemption amount is only $2,400.00. However, there is a $4,000.00 wild card exemption that could be used to exempt additional equity in the auto or autos if the wild card is not needed to cover other assets. It also appears that these exemption limits are doubled if a husband and wife file jointly. Since I do not practice in Illinois, you need to contact an Illinois attorney to make sure that the above exemptions are correct and determine if there are other exemptions that would apply.

    Because of the low exemption level, you may be forced to file a chapter 13 case instead of a case under chapter 7. If you file a chapter 7, you may be required to purchase your equity in the non-exempt assets or non-exempt equity from the chapter 7 trustee to keep those items. You really need to contact an attorney in your area that is qualified to advise you about your options and to advise you about the advantages and disadvantages to filing bankruptcy under chapter 7 or chapter 13. You can search for a qualified attorney at superlawyers.com and abcworld.org. Search for consumer bankruptcy lawyers in your state.

    Finally, many clients tell me, I can’t file a chapter 13 because I cannot afford to pay all of my debt. Chapter 13 is a reorganization of debt. In chapter 13, some debtors pay nothing to their unsecured debt, many others pay only a portion or a percentage of their unsecured debt (many times a small percentage of that debt). How much you would be required to pay would depend upon two factors: 1) your income and expenses showing what you can afford to pay and 2) how much creditors would be paid by the chapter 7 trustee if he/she liquidated your non-exempt assets and paid unsecured creditors from the funds remaining after paying his/her fees and expenses and then paid any priority debt (usually back child support and/or certain taxes). Again, a qualified attorney in your area can help you make the best decision for you.

  11. Posted March 12, 2015 at 12:11 pm | Permalink

    I was talking to a buddy of mine, and he said that he is looking at filing for chapter 7 bankruptcy. I realized I didn’t know much about bankruptcy, and that I needed to be a little research. Before this, I had no idea what the different chapters were, and what they meant. Now I know that chapter 7 is like starting over. You lose everything, but are out of your previous debts.

  12. robert
    Posted March 14, 2015 at 10:13 am | Permalink

    Cooper,

    In most consumer bankruptcy cases in Mississippi, a debtor does not lose anything when they file under chapter 7 because most of them only own exempt or protected assets under Mississippi law or the few items that a debtor does hold are not exempt or the assets have a value that is too low for a trustee to attempt to sell the assets to pay fund to creditors. Generally, the only clients that do give up an asset are doing so because a creditor holds a valid lien that cannot be avoided under bankruptcy law (see article on lien avoidance) on the item and my client has decided that the item is not worth the amount that he/she owes on that lien. An example would be: A bankruptcy debtor has a car that is worth $10,000.00 and owes a loan in the amount of $15,000.00 with a high interest rate. Because of the amount owed and the interest rate, the debtor decides that the the amount owed and the monthly payment are too high to reaffirm that debt. Thus, he/she surrenders the car to the creditor and discharges the deficiency balance in the bankruptcy.

  13. Billy
    Posted March 18, 2015 at 5:45 pm | Permalink

    MY car was repossessed because I could not afford payments.I owe $3000 and their is no possible way I can pay unless the bank would do 1 to 2 payments for 1 to 2 years right when I get my taxes. If not what should I do in the bankruptcy?

  14. robert
    Posted March 19, 2015 at 5:26 am | Permalink

    Billy,

    The answer to your question could be different, depending upon the state and federal jurisdiction in which you reside. Mississippi Law gives the owner of the car the right to retrieve his/her repossessed vehicle by paying the amount that must be paid to bring the loan current and pay the repossession costs. However, there is no way to force a creditor to allow the payments to be made in any way other than the method set forth in the promissory note or purchase contract. In other words, if the loan requires monthly payments of $150.00 on the 5th of each month, then the lien holder cannot be forced to accept annual payments.

    In Mississippi, the owner of a repossessed auto can recover possession of his/her auto after the filing of a chapter 13 bankruptcy case, provided 1) he/she has insurance on the vehicle which contains collision and comprehensive coverage with a loss payee clause showing the name and address of the lien holder and 2) he/she has the ability to propose a feasible chapter 13 plan which will, among other things, provide for payment of the claim on the automobile loan over the life of the plan. In some cases, the plan can provide for payment of the value at a rate of 5.0% and in other cases, the plan must provided for payment of the full claim plus interest at a rate of 5.0%. In most of our cases, the interest rate on our client’s auto loan is much higher than 5.0%. Thus, we can save our client a substantial amount of money with the lower interest rate. In other cases, we can save our client even more money because we can strip down the loan and pay the value of the vehicle when the value is lower than the amount owed or full claim.

    As I stated, the law in other states may be different. For example, many states will not allow redemption by bringing the loan current. Instead, the only way to recover the repossessed vehicle without filing bankruptcy is to pay off the entire loan balance and pay the repossession costs unless the creditor voluntarily will agree to paying less than that amount. In at least one state, the law allows recovery of the vehicle on the first repossession by bringing the loan current. In a few states or federal jurisdictions, the owner of the repossessed vehicle cannot recover the vehicle by filing a chapter 13 case. As a result, you really need to contact a qualified attorney in your state to find out what your options are based upon your situation and the laws in your state and how bankruptcy can effect your rights where you live.

  15. Nicole
    Posted March 29, 2015 at 12:11 pm | Permalink

    I am overwhelmed with loans. I made this to pay off that and so on then I end up sick and paying tickets and just one thing went from another and I got significantly behind. I would like to be able to catch up and not be stressed because it’s causing health issues. I have about 6,000 in loans alone not including my car loan that I want to keep. Can you advise me on what my options are?

  16. robert
    Posted March 29, 2015 at 3:22 pm | Permalink

    Nicole,

    Please remember that judges in different parts of the country interpret bankruptcy laws differently. Thus, an attorney may not be able to handle a case with similar facts in the same manner. If you are considering bankruptcy, you really need to contact a qualified attorney in your area.

    Your bankruptcy options are to file bankruptcy under chapter 13 or chapter 7. With the limited information supplied by you, it is difficult to say which would benefit you the most. Below are several factors that could make a difference.

    1) If the loan on your car is a purchase money loan (the same loan you made when your purchased the car), the loan is less than 911 days old (910 days is just short of 2.5 years), and your interest on the auto loan is low, then chapter 13 might not help much at all. Before you file a chapter 7 to discharge $6,000.00 in unsecured debt, then you need to consider the cost of filing a chapter 7 in your area versus the benefits of discharging that debt.

    2) Assume that the auto loan was a 6 year loan and you have 5 years left with a current balance of $14,000.00 and the interest rate is 25% and payments of $411.00 per month. In a chapter 13 in the Northern District of Mississippi, we can propose a plan that allows you to keep your car and sets a payment to the car lender of the 14,000.00 with an interest rate of 5.0% and that plan will be approve in most cases.

    Paying $14,000.00 over five years at 25% would mean that you would end up paying approximately $10,650.00 in interest in addition to the $14,000.00 principal. The cost of the chapter 13, which would include the trustee’s fees for handling the distribution of funds, attorney’s fees and court costs. Even if you were able to pay all the attorney’s fees through the chapter 13 plan, your total monthly payment would be approximately $338.00 per month. (Interest, trustee’s fees and attorney’s fees would total approximately $6,270.00.)

    The above example assumes that your income and expenses would authorize us to propose a plan that pays nothing to the $6,000.00 in unsecured debt and that the unsecured debt and the unpaid interest on the car loan are discharged at the end of the bankruptcy.

    3) If the auto loan is either a non-purchase money loan or you borrowed the money to purchase the auto more than 910 days ago and if the value of the auto is substantially less than the amount you owe, then a plan can be proposed that allows you to keep your car paying the value instead of the balance on the loan and will allow you to keep the car.

    Again assume that you have the same loan balance ($14,000.00) and interest rate (25%), but the car is worth $10,000.00. If the loan is not a purchase money loan or if the purchase money loan was made more than 910 days prior to filing the case, then the plan can propose to pay the $10,000.00 value instead of the loan amount.

    Under this scenario, assuming your income and expenses would allow us to successfully propose a plan that only pays the value of the auto with 5.0% interest over 60 months, the plan payment with the same amount of attorney’s fees would result in a monthly payment of approximately $258.00 per month, discharging the rest of the debt upon completion of the plan.

    Nicole, there are so many other factors that have to be considered to determine which chapter would help you the most and determine whether bankruptcy is the right option at all. Again as I stated earlier, the ultimate answer depends upon the exemption laws of the state in which you live, the judge that is assigned to the case, the chapter 13 trustee that will handle the distribution of funds, you income, your expenses, are you an above median or below median debtor, etc. You really need to contact a qualified attorney in your area. In most areas of the country, attorneys will give you a low cost or free first consultation. Remember, you need to tell your attorney about every debt and all your assets so he/she can properly advise you on your options.

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