What is the difference between Chapter 7, 11 and 13?

April 21st, 2021 by Bunch & Brock

If you are facing mounting debt with no end in sight, then you may be considering bankruptcy as a way to get back on your feet and pursue a fresh start. But then the question becomes: what is the difference between Chapter 7, 11 and 13? The type of bankruptcy you choose will depend on several factors, including your current income, your future goals, and whether you’re seeking a personal or business bankruptcy.

All bankruptcy is governed by federal law (rather than state law), which is commonly referred to as the Bankruptcy Code.  The purpose of bankruptcy is to achieve debt relief, turn over a new leaf, and/or reorganize debt so that it is manageable.  It is not something to enter into lightly, yet under the right circumstances it can lift a financial burden, reduce stress and create a meaningful path forward.

Key Highlights

  • Chapter 7 is a “liquidation” bankruptcy that doesn’t require a repayment plan but does require you to sell some assets to pay creditors.
  • Chapter 11 is a “reorganization” bankruptcy for businesses that allows them to maintain day-to-day operations while creating a plan to repay creditors.
  • Chapter 13 is a “wage earner” bankruptcy that partially eliminates debt while reinstating other debt through a court-approved repayment plan lasting 3 to 5 years.

Different Types of Bankruptcy

Article 1 Section 8 Clause 4 of the U.S. Constitution provides for uniform bankruptcy laws throughout the country.  Therefore, bankruptcy laws do not differ from state to state.  However, within the federal Bankruptcy Code, there are different chapters that represent different forms of bankruptcy.  Following are some of the most common types of bankruptcy:

Chapter 7

Chapter 7 is the most common form of bankruptcy protection for individuals.  Also utilized by small-business owners, Chapter 7 is known as “liquidation bankruptcy.” When you file for Chapter 7, a portion of your property may be liquidated – or sold — to pay down your debt. Following the sale of your property (and the use of those proceeds to pay secured debt), most or all of your unsecured debts will be discharged.  You may be allowed to retain possession of any property classified as “exempt” under bankruptcy laws; these assets can include clothing, cars, equipment used for work (like tools) and household furnishings. 

Chapter 7 is generally for people whose total income is below the median income in Kentucky, and your income and debt will be subjected to something called a “means test” to determine whether you qualify.  Chapter 7 bankruptcy will stay on your credit record for 10 years. 

Chapter 11

While Chapter 7 is about liquidating a business or personal debt, Chapter 11 is designed to reorganize crippling debt while keeping a business open and maintaining day-to-day operations. Many large companies file under Chapter 11 of the Bankruptcy Code rather than Chapter 7 because they can still run their business, control the bankruptcy process and attempt to become profitable again while seeking protection from their creditors.  As in other bankruptcies, collection efforts by creditors are automatically halted. Management continues to operate the company, but all significant business decisions must be approved by a bankruptcy court, which can grant complete or partial relief of the company’s debts and contractual obligations. Typical contracts and debts that can be cancelled under Chapter 11 include supply and vendor contracts, loans, real estate leases, and other obligations.  Generally, a Chapter 11 bankruptcy can take six months to a year in court, depending on the complexity.  It is also a more expensive form of bankruptcy than Chapter 7, but the goal is to return a business to profitability.

Chapter 13

Chapter 13 is often called “wage earner” bankruptcy because it is for people who have a steady income but may be overwhelmed by debt obligations. Falling behind on mortgage payments is a common precursor to Chapter 13 bankruptcy. One of the most significant benefits of filing for Chapter 13 is that it halts foreclosure proceedings and offers you a chance to keep your family in your home.  It removes the threat of upheaval and eliminates the need to find a different place to live.  When you file for Chapter 13 bankruptcy protection, you put an immediate end to litigation, wage garnishment and other forms of harassment. You can take time to assess your situation and focus on restructuring debt.

Chapter 13 bankruptcy allows you to repay a portion of your debt via a court-approved repayment plan.  After successful completion of the repayment plan, all remaining eligible debt is discharged, including some credit card debt, department store debt, personal loans and other obligations.  Individuals who do not qualify under the “means test” for Chapter 7 often opt instead to file Chapter 13.  Filers have up to five years to repay creditors under Chapter 13.  Completed Chapter 13 bankruptcies stay on your credit report for 7 years.

Which Debts Cannot Be Eliminated Through Bankruptcy?

Some types of debt generally cannot be discharged through bankruptcy. There are rare exceptions, depending on the facts in an individual case. Debts that typically cannot be discharged include:

  • Child support
  • Alimony
  • Unpaid taxes
  • Student loans (unless you can prove “undue hardship”)
  • Debts for personal injury or death you caused while driving under the influence of alcohol or drugs
  • Debts you failed to list in your bankruptcy filing.

Contact a Skilled and Experienced Bankruptcy Lawyer Today

The bankruptcy attorneys at Bunch & Brock have helped countless clients just like you reestablish their financial footing and step into a brighter outlook.  Whether you are seeking a personal or business bankruptcy, our experienced Lexington, Kentucky, bankruptcy lawyers will ensure that you receive full protection under the law, put an end to harassing creditor phone calls and letters, and prevent legal mistakes that can prove costly.  Our years of experience mean we know how to utilize federal bankruptcy laws to your benefit and prevent any unintended consequences.  We will answer all your questions and stand beside you through every step of the process.  For an initial consultation about your case, call us at (859) 254-5522.  It’s the first step toward a better future.