Bankruptcy

Chapter 7: Liquidation

In Chapter 7 bankruptcy, the debtor’s assets are sold by an appointed trustee, who makes partial payments to creditors. The debtor has the right to retain an interest in certain partially exempt assets, including a residence, car, clothing, household appliances and furnishings, life insurance, pensions and tools of the debtor’s trade. Creditors retain the right to any collateral the debtor has pledged to a secured loan. The entire procedure usually takes four to six months and an individual can only file for chapter seven once every six years.

Chapter 11: Reorganization for Businesses and Individuals

Chapter 11 is generally used to reorganize businesses, but individuals are also eligible. The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one ore more committees to represent the interest of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholder, and approved by the court. Under chapter 11, businesses can continue to operate under supervision while repaying creditors through the court-approved plan.

Chapter 13: Reorganization for Individuals

Chapter 13 allows individuals with a regular income to repay debt over a period of time in accordance with a court-approved plan. Only individuals with less than $250,000 of unsecured debt or $750,000 of secured debt are eligible for Chapter 13 Bankruptcy protection.

(Thanks to Kristin Brannen)