Law Offices of Nicholas Gebelt

What Are The Different Chapters Of Bankruptcy Available To Individuals?


  1. Bankruptcy for Individuals: Chapters 7, 11, and 13
    There are three chapters under which individuals typically file: 7, 11, and 13.

    1. Chapter 7
      In a Chapter 7 bankruptcy, the individual erases debts in one fell swoop. The whole process usually only takes five or six months, after which the debtor can enter a debt-free future. However, if the debtor has too much income — in a way that can be made precise — then the debtor is ineligible for a Chapter 7 bankruptcy. In addition, if the debtor has a lot of nonexempt assets, then those assets will be on the chopping block, meaning the Chapter 7 Trustee assigned to the case will seize and liquidate them for the benefit of creditors. For these reasons, Chapter 7 bankruptcy isn’t an attractive option for everyone.
    2. Chapter 13
      If the debtor’s income is too high, then the next option is Chapter 13 bankruptcy, which I like to think of as “Chapter 11 light. ” It’s much less complicated than Chapter 11 bankruptcy, and is concomitantly less expensive. It involves a plan of reorganization under which the debtor proposes to pay some portion of the debts, typically over a five-year period. If the debtor’s income is below the median, it is a three-year period. However, most below-median-income debtors will probably file a Chapter 7 bankruptcy, unless either they have nonexempt assets that they don’t want to lose, or they are ineligible for Chapter 7 protection due to a prior, relatively recent bankruptcy.

      As in Chapter 11, in a Chapter 13 bankruptcy there is a paternalistic patina over the whole process: Without the judge’s permission, the debtor can’t buy a car, take out a loan, or change the terms of the plan in response to a diminution in income.

    3. Chapter 11
      Chapter 13 bankruptcy has secured and unsecured debt ceilings, both of which will change in the not-too-distant future. If a debtor exceeds either ceiling, then Chapter 13 is unavailable. That is why some individuals file under Chapter 11. A Chapter 11 bankruptcy is much more complicated than Chapter 13, which means the attorney will have more work to do, so it will cost more. Chapter 11 bankruptcy is not for everyone, but for those who are good candidates, it can be a very powerful tool.
  2. Business Bankruptcy
    Chapter 13 bankruptcy is not available to businesses, but Chapter 7 and Chapter 11 are.

    1. Chapter 7
      If a business chooses Chapter 7, all of its assets will be liquidated by the Chapter 7 Trustee appointed to the case, and the proceeds will be used to pay the creditors. From a business’s point of view, this is pretty extreme relief: It’s suicide because at the completion of the case the business no longer exists. As a consequence, a business cannot get a discharge under Chapter 7.

      An additional complication is that if the principals are personally liable on the debts, and if the debts have not been paid in full after the liquidation, then the principals may be liable for the unpaid portion. As a result, Chapter 7 isn’t the best route for every business. However, it can make sense if the principals have no personal liability, there are assets to be liquidated, and the principals don’t want to have the headache of liquidating the assets and paying out the claims.

    2. Chapter 11
      Chapter 11 bankruptcy is the most complicated chapter of the Bankruptcy Code, but it can be very useful in developing a plan of reorganization that ensures a business’s future success. This topic is discussed in more detail in the next chapter.

For more information on Different Chapters Of Bankruptcy In California, a free 20 minute phone strategy session is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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