Bankruptcy involves filing a case under one of the chapters of Title 11 of the United States Code. 

The two most common types of bankruptcy cases are filed under chapter 7 and chapter 13. 

Chapter 7 refers to a “liquidation” bankruptcy and is designed for individuals and businesses in financial difficulty who do not have the ability to pay their existing debts. A chapter 7 requires a debtor to give up property which exceeds certain limits called exemptions, so the property can be sold by the trustee to pay creditors according to priorities of the Bankruptcy Code. In exchange, a debtor is allowed to keep exempt property and receives a discharge (a court order that releases a debtor from personal liability for certain specific debts). If all the debtor’s assets are exempt or if minimal assets are found, the case will be a “no-asset case,” with no distribution to creditors. 

Chapter 13, also known as a “wage earner’s plan,” enables individuals with regular income and debts that are below certain statutory limits to develop a plan to repay all or part of their debts over a three to five year period. Payments are made to a chapter 13 standing trustee, who makes distributions to creditors according to the provisions of a confirmed plan.  Filing a chapter 13 case allows debtors to keep valuable property – especially a home and car – which might otherwise be lost to foreclosure or repossession, if the debtor can make the payments which the bankruptcy law requires to be made to creditors.  In most cases, payments will be equal to the regular monthly payments on the mortgage or car loan, with some additional payment to get caught up on the amount the debtor has fallen behind. Corporations and partnerships may not file under chapter 13.  

While chapter 11 is primarily designed for a business, individuals with considerable debt, who do not qualify under chapter 13, may file under chapter 11.

Chapter 11, also called the “reorganization chapter,” allows a business to reorganize and restructure its finances so that it may continue to operate.  The debtor remains in control of the business and is referred to as a “debtor-in-possession,” with rights and duties of a trustee. The chapter 11 debtor’s ultimate goal is to file a “plan of reorganization” that is acceptable to creditors and the Court. The plan of reorganization outlines how the debtor will pay its creditors and reorganize its obligations and operations.  No trustee is appointed in a chapter 11 case unless an interested party asks the court to do so and shows sufficient cause (e.g., fraud or mismanagement on the part of the debtor). A committee of unsecured creditors is usually appointed in a chapter 11 case to monitor the debtor's progress.

Additional chapters under Title 11 of the United States Code:

Chapter 9 is designed to allow a municipality to continue operating while it works out a repayment plan for its creditors.

Chapter 12 allows family farmers or family fishermen with financial difficulties to repay debts over a period of time from future earnings through a plan.

Chapter 15 cases are commenced by a "foreign representative" filing a petition for recognition of a "foreign proceeding" giving the foreign representative the right of direct access to U.S. courts.

For additional information on all chapters, please visit the U.S. Courts website:  Bankruptcy Basics