Understanding the Difference Between Chapter 7, 11, and 13

A Chapter 7 Bankruptcy

​A chapter 7 bankruptcy is basically a trade — the person who files bankruptcy trades their non-essential or luxury property (for example, a boat, stock options, or expensive jewelry) in exchange for the elimination of their obligation to pay most kinds of debt. In a chapter 7, the person filing is not required to make any payments to creditors from the money that they earn. However, they can choose to continue to make payments for important property that they want to keep, like their home or car. 

In a chapter 7 bankruptcy, any significant luxury items are turned over to the court so that they can be sold. The money generated from that sale is divided up among the creditors. A share of the sale proceeds is all that creditors receive and, in most cases, the obligation to pay the remaining debt is legally eliminated–called “discharged.” However, there are some kinds of debts that cannot be discharged, like alimony, child support, certain taxes and usually, student loans. For more information about which kinds of debts are dischargeable, you should talk to a lawyer. I’d be happy to talk to you. 

What if I don’t have any luxury property or significant assets? 

Even someone who does not have any luxury goods can still be eligible for a discharge of their debt in a chapter 7. In those kinds of cases, called “no asset” cases, the creditors do not receive anything but the obligation to repay the debt is still eliminated. In Massachusetts, because the legislature has been generous in defining what counts as essential, non-luxury property, most chapter 7 cases are “no asset” cases. 

Can anyone file chapter 7? 

A chapter 7 bankruptcy is primarily for individuals who really can’t afford to pay anything to their creditors. Based on their income and expenses, they just don’t have the means. But if you do have the means to repay something, you may need to file a chapter 13 bankruptcy instead. You will want to talk to a lawyer about this, too.Chapter 7 bankruptcy is also available to individuals who have mostly business-related debt, or for businesses that are shutting down. For Businesses When a business files chapter 7, the business is shut down and the business assets are sold to pay creditors. Instead of receiving a discharge, the business is liquidated. It’s important to note that a business’s bankruptcy does not eliminate the obligation of anyone who has co-signed or personally guaranteed the business’s debt. 

Chapter 11 Bankruptcy

A chapter 11 bankruptcy is a reorganization, primarily for businesses, but also available to individuals with high debt or significant assets.  In a chapter 11 case, you propose a plan of reorganization that your creditors get to vote to accept or reject.  If most of your creditors agree that your plan of reorganization is a good deal for them, the plan may be confirmed by the court and you can continue to operate your business or your life according to the terms of the plan we've developed together.  

In a chapter 11 bankruptcy you may be able to:

• restructure secured debt, including cramming down principal to the value of the collateral and adjusting the interest rate

• catch up on taxes or other payments over time

• significantly reduce your amount of unsecured debt

• put a halt to expensive litigation and resolve all creditor disputes in the bankruptcy court

  
  

If you think a chapter 11 bankruptcy might help you or your business, you should talk to an attorney. I would be happy to talk with you. 

Chapter 13 Bankruptcy

A chapter 13 bankruptcy is basically a good-faith repayment plan. You pay what you can afford for anywhere from three to five years, depending on your circumstances. After the payment plan is over, the obligation to pay any debt that remains is eliminated, or “discharged,” unless the debt is one of the kinds that cannot be discharged.

Why file a chapter 13?

A chapter 13 bankruptcy offers flexibility and financial rehabilitation that a chapter 7 does not. Where the goal of a chapter 7 bankruptcy is simply to eliminate the obligation to pay certain debts, in a chapter 13, the goal is usually some sort of financial reorganization — for instance, eliminating the obligation to pay credit card debt while at the same time catching up on mortgage arrears (i.e. past due payments) or paying a debt that can’t be discharged, like certain taxes or child support.

One of the most common reasons people file chapter 13 bankruptcy is to stop a foreclosure and have a chance either to modify their mortgage loan or catch up on their mortgage payments over time.

In a chapter 13 bankruptcy you may be able to:

• catch up on your mortgage payments over five years and avoid foreclosure

• “strip off” (i.e. remove from the property) mortgages that are 100% underwater

• sell certain property and protect the equity from creditors

• pay past due taxes, alimony and child support

• keep your luxury property and instead, pay its value back to your creditors over time

  
  

The "Means Test"

 Another reason someone might file a chapter 13 bankruptcy is because they can afford to pay something back, they just can’t afford to pay everything back–at least not on the terms required by the creditors.

If your income is higher than most people’s and you have money left over every month, then you might have the means to pay a percentage back to your creditors. The law provides a formula for determining what you can afford to pay every month based on your income and your expenses — this is the “means test.”

The idea is that if you make more money than most people and you don’t have any exceptional expenses, then it’s only fair that you pay back what you can, at least for a while. After the five year payment plan has been completed, your obligation to repay any remaining debt is eliminated, or “discharged,” unless the debt is of a kind that cannot be discharged.

If you think a chapter 13 bankruptcy might help you, you should talk to an attorney. We would be happy to talk to you.