Understanding the Difference Between Chapter 7, Chapter 11 and Chapter 13 Bankruptcy

If you are in a time of severe financial strain, as many of us are during the coronavirus pandemic, you may feel overwhelmed with knowing how to move forward to stay afloat. While filing for bankruptcy is a very serious action, it may be the best choice to give you needed relief and help you or your business get back on track. Here, the qualified bankruptcy attorneys at Grossbart, Portney & Rosenberg, P.A. discuss the differences between Chapter 7, Chapter 11 and Chapter 13 bankruptcy, and how to seek legal counsel to help guide you through the process. 

What is Chapter 7 Bankruptcy? 

Chapter 7 bankruptcy, unlike Chapter 13 bankruptcy, does not involve filing a repayment plan. Instead, the bankruptcy trustee gathers the individual’s nonexempt assets and sells them to pay creditors as a form of repayment. Additionally, chapter 7 bankruptcy can be filed as an individual bankruptcy or as a business, and the process of repayment varies by state. Also known as a straight bankruptcy or liquidation bankruptcy, the process begins when the court places a temporary hold on your assets, meaning that banks can not automatically garnish your wages, foreclose your home or repossess your property until a trustee is appointed. From there, individuals will have a list of exempt and nonexempt assets that will be used to repay creditors, allowing individuals who have filed for bankruptcy to receive forgiveness of debt in exchange for their nonexempt assets. While both Chapter 7 and Chapter 13 bankruptcies involve consumers, the largest difference is that Chapter 13 bankruptcy requires a payment plan, while Chapter 7 does not. 

What is Chapter 13 Bankruptcy? 

As stated, Chapter 13 bankruptcy also relates to consumers, in which individuals will enter a 3-to-5 year payment plan in which they pay the trustee who then delivers debt repayment to the proper creditors. While Chapter 7 bankruptcy tends to take a shorter amount of time, Chapter 13 is beneficial for some individuals to file for as it lets them keep their property and create a payment plan for their debt, rather than using their assets as a form of repayment. In addition, Chapter 13 bankruptcy allows debtors to pay past-due payments, such as income taxes or domestic support payments over the Chapter 13 payment plan. In comparison to Chapter 7, Chapter 13 bankruptcy is often used for individuals who would like a long-term payment plan in which they can keep their property, and enlist the help of professional counsel without fear of having to relinquish their property upfront. 

What is Chapter 11 Bankruptcy? 

Different from Chapter 7 and Chapter 13 bankruptcies, Chapter 11 bankruptcy is structured for businesses rather than consumers. As a “reorganization” bankruptcy like Chapter 13, Chapter 11 bankruptcy allows businesses to restructure their business assets in order to repay debt. During Chapter 11 bankruptcy, businesses are generally able to stay open and operational, but they must go through the court during various business transactions during this time. Businesses in Chapter 11 bankruptcy cannot sell or terminate their rental agreements or expand their business operations without the approval of the court, or arrange a loan that will go into effect after their bankruptcy repayment is complete. Within this form of bankruptcy, businesses have the chance to propose a reorganization plan, which involves downsizing their business or expenses, creating a payment plan or liquidating certain assets as a form of repayment to creditors. Once a business chooses the plan they would like to take, they then bring it to the court who will approve or deny it. It is important to note that in recent months the implementation and additions to the CARES and SBRA acts have brought changes to Chapter 11 bankruptcy, especially for small businesses. 

Speak With Bankruptcy Attorneys at Grossbart, Portney & Rosenberg, P.A.

At Grossbart, Portney & Rosenberg, P.A., we work diligently to ensure that our clients fully understand the bankruptcy process, and are able to repay their debts with confidence that they are protected. We understand that the bankruptcy process for both individuals and businesses can be overwhelming, which is why we make it our priority to communicate effectively with our clients, creditors and courts. To learn more about how our qualified bankruptcy attorneys can assist you, contact our Baltimore office today.