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The Bankruptcy Code is divided into several chapters containing provisions for the adminsitration of the case.
Chapter 7 Liquidation
A Chapter 7 bankruptcy is commonly known as a liquidating bankruptcy or "straight" bankruptcy and typically is chosen by persons and businesses having few or no assets, high debt that is not secured by collateral (eg. credit cards and medical bills), and income that barely meets expenses. In a Chapter 7, the trustee investigates the debtor's property and possible claims and rights that make up the "bankruptcy estate" to determine if anything may be sold to pay creditors. Creditors receive payment in a Chapter 7 case only if the trustee recovers assets.
Individuals are entitled to keep a certain amount of their property free from distributions to creditors by claiming statutory "exempions" for property necessary for the basic living needs of themselves and their families.
Chapters 11, 12, and 13 Reorganization Chapters 11, 12, and 13 generally are cases in which a debtor seeks reorganization of its financial affairs. In cases under these chapters, creditors are paid through a plan "confirmed" or approved by the bankruptcy court. Repayment under these plans generally occurs over several years.
Chapter 11 is a business reorganization, usually employed by corporations, partnership and limited liability companies. However, a person in business as a sole proprietor and owing large debts may qualify for relief under Chapter 11. The Chapter 11 case also can be used to sell property and wind down operations in an orderly manner, and when used, is referred to as a "liquidating 11."
Chapter 12 provides for bankruptcy relief for the family farmer.
A Chapter 13 case is the means for individuals to effect a personal reorganization, reduce or change payment terms and keep property free from liquidation. Commonly known as a "wage-earner plan," a Chapter 13 bankruptcy requires the debtor to have sufficient income to pay a specific amount to be distributed among the creditors. Chapter 13 cases usually are filed by debtors that are delinquent in payments to creditors having security in collateral, such as in a house or car. The Chapter 13 trustee acts on the creditors' behalf to collect payments from the debtor and disbursement them to the creditors under the terms of a confirmed bankruptcy plan. There are certain limits for secured and unsecured debt under Chapter 13. If a person exceeds these limits her or she may consider a Chapter 11.
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