Each type of bankruptcy is referred to by the “chapter” of the bankruptcy code that provides that type of relief. For most individuals, there are only three chapters that are relevant to discuss. Chapter 11 is geared more toward businesses and individuals with very high income or very large debt amounts, and that is why we list it last.
Note: Not all debts can be discharged through bankruptcy, and certain debts are dischargeable in a Chapter 13 or 11 that are non-dischargeable in a Chapter 7.
Chapter 7 – Liquidation
Chapter 7 is what most people think of when they think about bankruptcy. In a Chapter 7, your debts are discharged (erased) in a relatively quick process. You are allowed various “exemptions” that entitle you to keep certain property covered by the exemption. For many people, everything they own is covered by exemptions (a bankruptcy attorney can advise you as to what property you can exempt). Property that is not exempt becomes “property of the estate,” which means that it will be gathered up by the Trustee and sold; the money from the sale will go to pay off creditor claims. This is all the money the creditors will get, and your debts will be discharged, which means the creditor can no longer sue you for that debt.
Upside: Quickest, lowest cost, no payments. Often times, you can keep everything you own.
Downside: Shows up on your credit report for 10 years. Certain debts are not dischargeable (but can be discharged in a Chapter 11 or 13). Might not be able to keep everything you own. Cannot strip a mortgage off your home.
Chapter 13 – Payment Plan
Chapter 13 is a payment plan option in which you get to keep all of your assets. While many people are entitled to keep all of their property in a Chapter 7, there are also many people that have more property than they can exempt. The amount that needs to be repaid during the plan varies, but usually, debts are repaid at only a small fraction of the total amount (often, its 10% or less). The payments must be made monthly for either 3 or 5 years (depending upon your circumstances).
Chapter 13 is only available to “individuals with regular income;” regular income is a very broad term and can include regular gifts, public benefits, and most commonly, a job. This is a requirement because without a regular income, it would not be possible for you to make payments on the required payment plan.
Upside: Get to keep everything you own. Can discharge certain debts that are non-dischargeable in a Chapter 7. Possible to strip a mortgage from a home. Only reported on your credit for 7 years.
Downside: Costs more than a Chapter 7. Monthly payments are required for either 3 or 5 years.
Chapter 11 – Reorganization
Chapter 11 can be thought of as a Chapter 13, but mainly for businesses. People with very large amounts of debt can’t qualify for Chapter 13, so they are allowed to file under Chapter 11. The big difference is the amount of court supervision that is required for a Chapter 11. This means much more work for the debtor (mostly preparing reports and records for the court) and much more work by attorneys and accountants.
Upside: All the same benefits as a Chapter 13. Available for people with too much debt to qualify for a Chapter 13 and too much property they want to keep for a Chapter 7.
Downside: Very expensive and requires a lot of court supervision (which is the main reason it is so much more expensive).