Bankruptcy Chapters and their Key Features

There are six different types of bankruptcy. Each type has its own chapter in the United States Code, so they are called bankruptcy chapters. The first two chapters we will discuss are those most commonly filed by individuals. Some other chapters are also used by individuals but are only done so in specific situations. All of them help provide the filing person, either a business or individual, a “fresh start” by removing old financial burdens. In this section we provide a brief overview of the various individual, or consumer bankruptcy chapters and some of their key features.

This page is meant to provide a general overview of what you can expect in a smooth bankruptcy. There are of course a wide number of variations that can occur in any bankruptcy that would make your filing look very different from the one discussed. Remember to talk with your attorney about the details of your case and how your filing will be impacted by those details. The information below is also based on what occurs in the Eastern District of Wisconsin and procedures and requirements may vary depending on your jurisdiction.

Return to Bankruptcy Q&A

Schedule a Free Bankruptcy Consultation


Chapter 7

Chapter 7 bankruptcies are by far the most common type of bankruptcy filed. Over 60% of all bankruptcy filings between June 30, 2014 and June 31, 2015 were Chapter 7 cases. These cases are best for use with unsecured, non-priority debts; examples of best fit debts are medical debts, judgments, and credit card bills. Past clients have used Chapter 7 bankruptcies to remove garnishments, make income available for new purchases, and to avoid utility cutoff. This type of bankruptcy doesn’t easily remove back payments on car loans, mortgages or other secured debts. Other debts, considered priority debts, aren’t affected much by this type of bankruptcy either.

When filing a Chapter 7 bankruptcy, there are several steps that the debtor must prepare. Before filing, preparation of bankruptcy petition and schedules are the primary focus. In these schedules, assets, income, expenses, and debts are all disclosed and analyzed for easy processing. Other events that are relevant to the bankruptcy, such as whether or not there are pending lawsuits, or past preferential payments, are disclosed to the courts in the Statement of Financial Affairs. This process includes reviewing exactly where the debtor’s money is being spent, generating financial reports for the debtors and carefully reviewing the various types of real and personal property owned. In consumer cases, protection of the debtor’s belongings begins at this stage where the various types of assets are examined and determined which type of protection can be applied. Before filing, individual debtors must also take a credit counseling course. This requirement can be satisfied at a wide variety of approved courses, many of which are available at low cost online. Once the petition and schedules are prepared and any required counseling is completed the case can be filed.

After filing begins the reactionary phase of the bankruptcy.  There is one guaranteed meeting with the trustee called a Meeting of Creditors. Before this meeting, the trustee will ask for a list of documents which must be provided examples of which are paycheck statements and vehicle titles. At the meeting, the trustee asks a series of questions to you and your attorney regarding the accuracy of the various documents submitted to the court and the trustee. During the post-filing period, discussions with various creditors about reaffirmation, redemption, and other bankruptcy related discussions occur which can require various financial assessments and document preparation. Before discharge can be granted, the debtor must also take a financial management course, which is provided by the same groups that the credit counseling course provides. After approximately 3-4 months and all the required paperwork is submitted, a discharge will be issued for the debtor which frees the debtor from many of their debts.

Key Features:

  • Can be filed by individuals or businesses
  • Short Duration, usually over in 3-5 months
  • Generally inexpensive
  • No monthly payments
  • Clear Pre-Filing/Post-Filing distinction

Chapter 13

Chapter 13 bankruptcies are the second most common type of bankruptcy. These bankruptcies focus on debt consolidation where you pay a fixed monthly amount. The cases are best for people with regular incomes, secured debts, and priority debts; examples of those debts are mortgages, car notes, tax debt, and unemployment overpayment. Past clients have used Chapter 13 bankruptcies to pay off tax debt, remove second mortgages from their house, and catch up on car loans.

When filing under Chapter 13, there is pre- and post-filing preparation that must be done. As with Chapter 7, the petition and schedules must be prepared. In these documents all of the assets, the income, and expenditures, as well as the debts of the debtor are disclosed. In addition to those documents, a Chapter 13 plan must be prepared. This plan is a proposal payment plan that addresses the various creditors listed by the bankruptcy. The plan sets out how creditors are to be paid, in which order, and in what amounts. The debtor sets the monthly payment at this time and how that payment is to be set. This is an initial proposal that can change depending on what happens after filing. Some of the petition documents set a minimum monthly payment that is based on the debtor’s income, less certain types of expenses. This document must be prepared very carefully as accuracy is a must to prevent people from being forced into paying too much per month. The income and expense schedules must also demonstrate that the debtor has the ability to make the suggested payments. Individuals must take a credit counseling class prior to filing.

Filing the Chapter 13 triggers a wide variety of requirements on the debtor. Within 30 days the debtor must begin making payments according to the proposed plan. Once the Chapter 13 is filed, creditors start making claims in order to receive payments. These claims list the creditors understanding of the debts and how they are categorized. It is common for these to vary from the debtor’s information and sometimes this necessitates alterations to the plan. These types of adjustments are usually negotiated between the creditors’ and your attorney. A Meeting of Creditors is also required which usually is between the debtor and the trustee. At this meeting, the trustee reviews the petition and schedules for accuracy, seeks any updated information or adjustments, and also provides general information on payments. Sometime after this meeting, the plan is set for confirmation at which the judge may approve of the plan and payments are dispersed to the creditors on a monthly basis. After taking a financial management course and completion of the plan, the debtor can receive a discharge that removes various types of outstanding debts according to the plan and law.

Key Features:

  • Only individuals can file
  • Can spread payments over 3 to 5 years
  • Allows for removing liens off houses
  • Payments are tailored to the amount of your income and property
  • Only one monthly payment for a wide number of debts

 

Chapter 12

Chapter 12 bankruptcies are some of the rarest filed. They are limited to family farmers and fishermen. These bankruptcies operate similarly to Chapter 13, but are better suited to the high debts and more valuable assets associated with farming and fishing. They also avoid the high costs associated with Chapter 11 bankruptcies. This bankruptcy chapter is used when a farmer or fisher family operates as a business but isn’t large enough to make the best use of Chapter 11 techniques. The emphasis is on family and it is restricted to sole-proprietorships or family businesses where the family members actually run the operation.

Generally, the procedure is very similar to a Chapter 13 with variations primarily concerning the values.

Key Features:

  • Limited to farmers and fishers
  • Looks to annual income rather than monthly incomes
  • Can spread payments over 3 to 5 years
  • Only one monthly payment for a wide number of debts
  • Payments are tailored to the amount of your income and property