Most of us tend to assume that all bankruptcies are created equal. Not so. Here’s a look at the differences between the kinds of bankruptcy filings used by ordinary people.
There are actually several different kinds of bankruptcy. They vary in the completeness of the discharge of debts, and they vary in the kind and amount of property the debtor gets to keep. The “Chapters” referred to here are in the U.S. Bankruptcy Code.
Chapter 7 is a liquidation or “complete” bankruptcy, also sometimes called “straight bankruptcy.” The debtor gets to keep certain exempt property, and most liens (like mortgages on real property and liens on vehicles) remain in place. All or nearly all the debtor’s property is liquidated, and at the conclusion of the bankruptcy proceeding, the debtor gets a new start. There are some exceptions, however to the discharge of debts in a Chapter 7 bankruptcy, namely child support, alimony,
A Chapter 7 bankruptcy stays on your credit report for 10 years.
Chapter 7 bankruptcy is available to almost any individual debtor, so long as the court hasn’t determined that the debtor is trying to abuse the system by filing. In most courts, that includes a determination of whether the debtor has enough income to pay his or her debts and is simply trying to use Chapter 7 to improve his or her economic position.
Chapter 13 is in the nature of a restructuring. The debtor doesn’t escape the debt entirely but is allowed to pay less of it, pay it more slowly, or some combination of the two. The debtor typically gets to keep some property so income can continue to allow for payback. A Chapter 13 bankruptcy stays on your credit report for seven years.
Chapter 13 bankruptcy is not as freely available as is Chapter 7. The debtor must have “stable and regular” income, unsecured debts of less than $250,000, and secured debts of less than $750,000. Income can be stable and regular even if it’s not earned income. For example, alimony, child support, entrepreneurial income, and public assistance all have been found to qualify as stable and regular income in connection with a Chapter 13 bankruptcy.
If a debt is uncertain or contingent, it might not be included for purposes of the Chapter 13 test. In a few cases, this has allowed debtors with multi-million dollar exposure to lawsuits to use Chapter 13, because the claims were not yet liquidated at the time of filing. In general, though, Chapter 13 is set aside for individuals who have ordinary consumer debts.
Cities and counties can seek bankruptcy protection under Chapter 9 of the Bankruptcy code. Businesses (and ordinary people if they have debts of more than $1 million) may use a form of restructuring under Chapter 11. A Chapter 11 bankruptcy stays on the credit report of a person for 10 years. There’s no law about how long it stays on a business’s credit report, but most credit reporting agencies use 10 years.
Family farmers may use a little-known set of provisions under Chapter 12. A Chapter 12 bankruptcy stays on the credit report of the debtor for 10 years.