Law Office of Steven C. Hales, Inc.

Chapter 7* bankruptcy is known as liquidation, or “fresh start” bankruptcy.  In a Chapter 7 case, a trustee (assigned by the U.S. Trustee’s Office or chosen by the debtor’s creditors) may liquidate, or sell, the debtor’s non-exempt assets to pay all or a portion of the debts owed to creditors. As a practical matter, most assets owned by a debtor will be treated as exempt. Many Chapter 7 trustees find that more than 80 percent of their cases are resolved as "no asset" cases, meaning that all assets are exempt or encumbered with liens.
 
State law protects you from having certain property taken.  This property is “exempt” from liquidation during bankruptcy, and may include, for example, a certain amount of equity in a home, a vehicle, furniture, clothes, etc. 

When estimating the amount of money that can be made from selling a particular non-exempt item in a Chapter 7 liquidation bankruptcy, a bankruptcy trustee typically will subtract the individual’s exemption from the property’s “fair market value” (what a ready, willing and able buyer will pay for the property in “as is” condition).  The trustee also will subtract whatever the individual may owe for any liens or mortgages that may be on that property. 

The trustee will only liquidate assets that will net cash to pay your creditor. The trustee also must deduct the fees and expenses paid to any professionals (such as Realtors or auctioneers) assisting in the liquidation of the property). Through this liquidation process, any debts the trustee does not pay (with certain exceptions) will be discharged (eliminated), and creditors will not be able to force the individual debtor to pay any remaining amount owed.

Chapter 13* bankruptcy, or individual reorganization, is an alternative to Chapter 7 that allows an individual to keep his or her property.  In a Chapter 13 bankruptcy (unlike a Chapter 7 bankruptcy), the individual must pay a portion or all of the debt back.  The individual filing bankruptcy under Chapter 13 must be able to fund a payback plan and meet certain debt and asset limits.  Effective October 17, 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individuals who earn more than the median income (based on family size) in the state where they lived before filing bankruptcy, and who can repay at least $6,000 of their debt over five years, are no longer eligible for relief under Chapter 7. 
Instead, these individuals must repay their creditors over time through a Chapter 13 plan.  Under Chapter 13, an individual debtor would submit a plan detailing how all of his or her debts will be paid from disposable monthly income (income after providing for ordinary living expenses) over a period of time of up to five years.  The plan of reorganization is monitored by a Chapter 13 trustee and supervised by the bankruptcy court.  Upon the successful conclusion of payments under the plan, the bankruptcy court enters a discharge order.  A Chapter 13 debtor must pay the creditors at least as much as they would receive if the assets were liquidated in a Chapter 7 case.  In that way, Chapter 7 and 13 bankruptcies are treated equally.

Chapter 11* “reorganization” is typically used by corporations or businesses, or individuals whose debts exceed the Chapter 13 debt limits, as an alternative to Chapter 7 liquidation.  Since a reorganization under Chapter 11 can be a very expensive process, it is not frequently used by individuals.  In a Chapter 11 reorganization, as in a Chapter 13 reorganization, the business debtor keeps business assets and must pay creditors with future earnings according to a reorganization plan.

Chapter 12* is a special reorganization for family farmers.  To qualify, a family farmer must earn most of his or her income from family farming operations.

* As provided by the Ohio Bar Association (© 9/9/2010  Ohio State Bar Association)