Definitions & Explanations
The difference between the bankruptcy chapters is very nuanced. However, for our purposes there are two basic types of bankruptcy cases: liquidation and reorganization.
A liquidation is the sale of your property that cannot be exempted (protected). If most or all of your property falls under the “exempt” category then no sale takes place and you get to keep your property.
A reorganization usually consists of a plan to pay creditors at least a portion of their debts over an extended period of time.
A Chapter 7 is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. This type of bankruptcy looks at your income and also the value of your assets. It is possible to be asset-rich and cash-poor.
A Chapter 13, commonly known as “Wage Earner Plan” deals with the reorganization of individuals with regular income. This helps people pay back some, or all of their debts in a more manageable way. One of the additional benefits of such a plan is that government interest and penalties stop accruing during an active case.
A Chapter 11 deals with reorganizations of businesses and individuals who owe more than what a Chapter 13 is designed to handle.
A bankruptcy discharge removes a debtor’s obligation to repay certain debts. This is often just referred to as simply a “discharge.” This is the ultimate goal of a bankruptcy. Consider this is the “finish-line.