Chapter 7, a liquidation bankruptcy, is the most prevalent type of personal bankruptcy filed by individuals. Chapter 13, which is a reorganization bankruptcy, is gaining popularity since 2005, when Congress passed a law prohibiting the exploitation of chapter 7 bankruptcy filing (filing chapter 7 when the debtor is able to repay their debts). A chapter 7 bankruptcy is known as a liquidation bankruptcy because, when you file under chapter 7, your bankruptcy trustee will sell (liquidate) any non-exempt assets to repay your creditors (i.e., those to whom you owe money). However, certain of your assets are exempt in bankruptcy, and you will be able to retain them. In many instances, the debtor will not lose any property and has substantial debts that are all eligible for discharge in bankruptcy.
After the sale of your assets and completion of your bankruptcy case, the majority of your unsecured debts are discharged (exceptions include court judgments, child support, divorce payments, back taxes not older than three years, mortgages, and auto payments). If your average monthly income is greater than the state's average income, you must apply the means test to your financial situation to determine if you are eligible to file chapter 7. If the means test determines that you do not qualify for chapter 7 bankruptcy, you can still file for bankruptcy, but you must file chapter 13.
Chapters 11 and 12 are two additional common reorganization bankruptcy chapters.
Chapter 11 bankruptcy is comparable to Chapter 13 and is for businesses facing financial difficulties. Individuals may also register under Chapter 11, but only under exceptional circumstances (such as when the debtor's debts exceed the chapter 13 limit).
Chapter 12 bankruptcy is identical to chapter 13 bankruptcy, with the exception that 80% of the eligible obligations must be from a family farm. Chapter 12 bankruptcy has greater debt limits than chapter 13 to accommodate the substantial costs associated with farming. Chapter 12 bankruptcy is exceedingly uncommon.
Chapter 13 is the most common reorganization chapter for consumers, while chapter 11 is the most common reorganization chapter for businesses. When you file for reorganization bankruptcy, you enter into an agreement with your creditors to repay a portion (or, in some cases, all of your debts, with reduced interest, over a period of three to five years) of your debts. The amount you will pay will depend on a number of variables, including what you owe, your average monthly income, and the average income of your state. In a Chapter 13 bankruptcy, the re-payment plan must be approved by the majority of creditors (those holding the majority of the debt). Additionally, you must have less than $1,010,650 in secured debt and $336,900 in unsecured debt to qualify for chapter 13 bankruptcy. Secured debt is debt that is backed by an asset (such as a vehicle), whereas unsecured debt has no collateral (such as credit card debt).
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