How Chapter 7, 11 and 13 bankruptcy plans differ

While some signs have pointed to an improved national economy in the past few years, there are still many people who are left struggling financially due to the effects of the recession and other situations. Some people facing such challenges can benefit from filing for bankruptcy as a way to recover from unsurmountable debt levels and get a new start.

There are different types of bankruptcy options that range from complete discharge of debts to a structured payment plan. Learning how each one operates is an important step for anyone considering bankruptcy in order to select the right option.

Liquidation and discharge with a Chapter 7

A Chapter 7 bankruptcy is perhaps the most commonly known form of bankruptcy. It is frequently used by people with large amounts of unsecured debts, like medical bills or credit card debts. Discharge of debts under a Chapter 7 plan is generally faster and easier than with other forms of bankruptcy, at times taking as little as three months to complete.

Assets can be sold in a Chapter 7 as a way to pay back creditors. There are some stipulated levels of assets that can be exempt from bankruptcy proceedings, allowing debtors to retain some items up to select value levels. Automobiles or personal jewelry often fall under these exemptions.

It should be noted, as the American Bankruptcy Institute suggests, that items like child support payments or student loans cannot be included in a Chapter 7 proceeding.

Repayment of debt with a Chapter 13 or a Chapter 11

Both Chapter 13 and Chapter 11 bankruptcy plans offer the option to repay debt to creditors over a period of time. The biggest difference between these two plans is the level of debt that is allowable. Chapter 13 bankruptcies can only be utilized for debt up to certain amounts. Anything higher than those levels would make a Chapter 11 option the preferred plan.

The debts are consolidated into a single payment, made each month by the debtor to the trustee. The trustee works with each creditor to identify appropriate payoff amounts and then disperses monies to those creditors each month over the course of the bankruptcy plan. People with homes or other assets valued beyond the exemption levels of Chapter 7 plans can often benefit from these options.

Proceed with care

No matter what type of bankruptcy option is the best for a given situation, it is important for debtors to work with an experienced attorney. Legal guidance during a bankruptcy can help people to feel assured that their case is handled properly.