The Bankruptcy Code is divided into several chapters. When a debtor files a case, the debtor elects the chapter under which he or she will proceed. The different chapters have varying procedures for repayment of debt and obtaining a discharge.
Chapter 7: Often called the “liquidation chapter,” Chapter 7 is used by individuals and non-individuals who are unable to reorganize their financial affairs through a plan of repayment. There is no debt limitation under Chapter 7; however, certain individuals may not be eligible for Chapter 7 relief under the “Means Test.” In Chapter 7, the debtor’s non-exempt property is liquidated by the Chapter 7 Trustee and the proceeds from liquidation are distributed to creditors. At the conclusion of this process, the goal is for individual debtors to receive a discharge of their dischargeable debts.
Chapter 11: Chapter 11 and the remaining chapters of the Bankruptcy Code offer the debtor a chance to reorganize through a plan. Creditors vote on whether to accept or reject a plan of reorganization which must be approved by the court. While the debtor normally remains in control of the assets, the court can convert the case to a Chapter 7 case or order the appointment of a trustee in certain circumstances. In addition to the filing fee paid to the bankruptcy clerk, a quarterly fee is paid to the U.S. Trustee in all Chapter 11 cases. There is no debt limit under Chapter 11. It usually lasts at least a year and is the most expensive of the available chapters.
Chapter 13: Chapter 13 is the debt repayment chapter for individuals with regular income whose debts are below a certain statutory amount. Chapter 13 is not available to corporations or legal entities such as an LLC. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each Chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the Chapter 13 trustee who distributes the funds less an approved commission. Many debts that cannot be discharged can still be paid over time in a Chapter 13 plan and a debtor may be able to cure existing defaults on mortgage and car payments through a Chapter 13 plan. Most chapter 13 cases last 3-5 years. After completion of payments under the plan, Chapter 13 debtors receive a discharge, which is broader than the discharge received under Chapter 7.