Individuals and businesses faced with overwhelming debt obligations may choose to file for bankruptcy as a last resort. The U.S. Bankruptcy Code has established several variations on the proceedings with differing provisions. Knowing the differences between the major options can somewhat simplify the arduous decision process. Three of the most common bankruptcy procedures in the United States--Chapter 7, Chapter 11 and Chapter 13--seek debt relief via definite means.
Chapter 7 Liquidation
During Chapter 7 bankruptcy proceedings, a debtor's property is sold and proceeds forwarded to creditors. Federal provisions regarding Chapter 7 bankruptcy proceedings allow the debtor to retain certain necessary personal property. No luxury items or duplicates may be retained. For example, if the debtor has three automobiles, two will be sold. Documentation published by the U.S. Courts reiterates that a discharge of debt on property via a granted Chapter 7 bankruptcy petition does not clear liens from mortgaged property, regardless of the type and value of the property. The courts also clearly stipulate that suspected abuse, filing solely to keep from paying debts, will result in an automatic dismissal of the petition. The courts state that the sole purpose of Chapter 7 is to give honest people a chance to start again.
Chapter 11 Business Reorganization
Chapter 11 of the bankruptcy code permits a business or an individual operating a sole proprietorship to file a petition for bankruptcy and remain in business while settling debts. The debt obligations may be restructured, in some cases reduced, or payoff time extended, and a payment plan set up to pay off and settle the debts. An administrator, known as a U.S. trustee, appointed by the courts supervises and works closely with the business until debts are settled. The administrator regularly reviews the business operations and finances and works with the petitioner and the courts until the case is closed.
Chapter 13 Personal Reorganization
Individuals who have a predictive sufficient income may seek to reorganize debt obligations under Chapter 13 bankruptcy provisions. According to the U.S. Courts, when filing for bankruptcy is necessary, an individual may choose Chapter 13 over Chapter 7 to avoid foreclosure on a private home. In contrast to Chapter 7 regulations, Chapter 13 allows the homeowner an opportunity to bring mortgage payments up-to-date. In addition, qualifying individuals can retain possession of personal property and pay down debt on a set schedule. The courts give three or five years as the typical time to settle a Chapter 13 case.
The basic difference between Chapter 7 and Chapters 11 and 13 bankruptcy procedures is the means by which debt relief is achieved. Chapter 7 proceedings can be thought of as liquidation. The debtor's property is sold with proceeds going toward outstanding debts. Chapter 11, more often used by businesses than individuals, permits the business to reorganize and service debts over time, while maintaining an operational business enterprise. Chapter 13 proceedings provide an opportunity for individuals to reorganize finances and pay off debts in an allotted amount of time.
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.