There are several different types of bankruptcy cases:
· Chapter 7—Liquidation
· Chapter 11—Reorganization (or liquidation)
· Chapter 12—Family Farmer Reorganization
· Chapter 13—Adjustments of Debts of Individual Regular Income
In a Chapter 7 liquidation case, sometimes referred to as “straight bankruptcy,” a trustee is appointed to collect and liquidate the debtor’s non-exempt assets (see below for an explanation of “non-exempt assets”) and to pay the proceeds to creditors in the order set forth in the Bankruptcy Code. Most Chapter 7 cases are “no asset” cases. This means that the debtor does not have sufficient non-exempt assets or sufficient income to make any distribution to unsecured creditors. Unsecured creditors are those who do not have a valid lien on collateral.
Chapter 11 is available to individuals and businesses who seek to reorganize their affairs or to liquidate in an orderly manner. In Chapter 11, the debtor remains in control of his property and operates as a “debtor in possession” subject to bankruptcy court supervision. In Chapter 11, the debtor is allowed a certain period of time within which to propose a plan of reorganization. The plan of reorganization sets the terms for payment of the debts. The terms of Chapter 11 plans vary depending on the nature of the debt or the type of business the debtor operates, and creditors usually get to vote on the plan.
Chapter 12 allows family farmers with regular annual income to adjust their debts. Generally, the family farmer must have less than $1.5 million in debts (80% of which must arise out of the farming operation) and at least 50% of the individual’s gross income must come from the farming operation. A family farmer must have regular and stable income that enables him or her to repay his or her creditors under a long term plan.
Chapter 13 is available to individuals with regular income who owe unsecured debts of less than $307,675 (unsecured debts are debts owed to creditors who do not have liens on any collateral) and secured debts of less than $922,975 (secured debts are debts subject to valid liens such as mortgages and car loans). These are the figures as of April 2006 and are subject to change by Congress. By choosing Chapter 13, an individual debtor may avoid a Chapter 7 liquidation, stop home mortgage foreclosures, reinstate defaulted home mortgages and obtain a broader discharge of debts than is available in a Chapter 7 liquidation. In exchange, the debtor in a Chapter 13 case must repay unsecured creditors a portion of their claims from the debtor’s future income over a three to five year period. Ordinarily, payments to unsecured creditors will be made by the Chapter 13 Trustee according to the plan filed by the debtor and approved by the bankruptcy judge.