Chapter 7 bankruptcy is a liquidation proceeding designed for those experiencing financial difficulty that do not have the ability to pay their existing debts. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. In the clear majority of cases the debtor keeps all property because the debtor has no non-exempt assets for the trustee to distribute. This is called a “no asset case”. In approximately four months the debtor receives a “discharge” of all dischargeable debts, providing the debtor with a “fresh start.”
Chapter 13 bankruptcy is a wage earner’s plan. Chapter 13 allows individuals with regular income to propose a plan to repay all or part of their debts. The plan sets forth an agreement to make installment payments to creditors over a three to five-year period. After the plan is confirmed by the Court, the law forbids creditors from starting or continuing collection efforts. After the plan is paid in full the debtor(s) will be granted a “discharge” from all debts that are eligible to be discharged.
Chapter 11 is a reorganization proceeding usually for businesses, but also available to individuals. Individuals generally do not file Chapter 11 unless their assets or debts exceed the limits of Chapter 13, or they are unable to complete a plan within 3 to 5 years. In Chapter 11, the debtor usually remains in possession of the assets and continues to operate any business, subject to the oversight of the court and the creditors committee. The debtor proposes a plan of reorganization, that upon acceptance by a majority of the creditors, is confirmed by the Bankruptcy Court and binds both the debtor and the creditors.
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