Is There More Than One Type of Bankruptcy? -

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Friday, Jul. 4, 2008

Is There More Than One Type of Bankruptcy?

Yes, there are several types, each provided in a separate chapter of the Bankruptcy Code, a federal statute. Proceedings under Chapter 7 (straight bankruptcy) involve surrendering most of the borrower's nonexempt assets, as explained later. A bankruptcy trustee is appointed in every Chapter 7 case to administer the nonexempt assets (if any) and distribute either the assets themselves or the proceeds from selling (liquidating) them among the creditors. Proceedings under Chapter 13 (wage earner's bankruptcy) require the debtor to propose a plan for repaying all or a portion of the debt in installments from the debtor's income. Chapter 11 of the Code, which covers businesses that are restructuring while continuing operations generally is not used by consumer debtors. While an individual may file under some circumstances for Chapter 11 bankruptcy, such proceedings are more expensive and complex, so that consumer debtors normally use Chapter 7 or Chapter 13.

Under any chapter, once the bankruptcy case ends, most borrowers are no longer liable for most of their pre-petition debts. (The bankruptcy court enters a discharge order relatively early in a Chapter 7 case; in Chapter 13 cases the borrower makes full or partial payment to creditors under a court-confirmed plan over a period up to three years long, or with court approval, up to five years, and then receives a discharge.) This means the court has excused the borrower from having to pay most debts. (It should be noted, however, that in a Chapter 7 case, the discharge does not wipe out a secured creditor's lien.) The borrower then starts over again with a clean financial slate except that the record of the bankruptcy will remain on the borrower's credit record for up to ten years.