Making Sense of Bankruptcy

In The Tulsa Oklahoma Area

Quick Overview: Difference between Chapter 7, 11, and 13

There is a lot of confusion and apprehension about filing bankruptcy. Some people believe they will lose everything they own. Others think they can keep everything and still get rid of all of their debt. Just like anything else, the truth lies somewhere in the middle. It all depends on your unique situation and how the bankruptcy laws apply to you. Every situation is different, and thus every individual bankruptcy case is different. When every case is different, the proper planning is also different. Therefore, it is important to know the difference between Chapter 7, 11, and 13.

A debtor is a person who owes a debt for goods, services, or most commonly money borrowed. Once upon a time, there was an awful concept called “Debtor’s Jail,” where Debtors were put in jail until their debts were paid. This concept obviously makes no sense. Luckily, our forefathers understood that Debtor’s Jail was just foolish and it was eliminated.

They didn’t get it 100% right, though. After Debtor’s Jail, but before recent history, you had to sell the shirt off your back to square up your debts.

These days, that is NOT the case. The Courts understand that one needs basic necessities and property. These basic necessities include: a place to live, a form of transportation, clothes to wear, and so on. There are just some things you need to keep going about your life. Taking away every single belonging from a debtor would be no use to anyone. In order to allow a debtor to “protect,” and there therefore, keep, some of these things, the court allows the use of “exemptions.” An exemption is a protection written into law that either completely, or partially, protects certain properties and their values.

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".