Bankruptcy Chapter 7, 11, 13

Consumers and corporates consider filing bankruptcy when they are unable to discharge their debt obligations. Filing bankruptcy either results in restructuring a company or liquidating the assets of a company/individual in order to settle the dues. Generally, debt laden individuals prefer filing bankruptcy under Chapter 7 of the US Bankruptcy Code. In case they are not eligible to file under Chapter 7, they can try and file under Chapter 13. The latter is meant for both individuals and sole proprietors. Chapter 11 is primarily meant for companies that want to avoid liquidation. It helps to restructure or reorganize the company, so that the company can continue its operations.

Defining Bankruptcy Chapters: 7, 11, and 13

Bankruptcy Chapter 7
Filing bankruptcy under Chapter 7, is an alternative for people who are unable to discharge their debt obligations. A person, filing bankruptcy under Chapter 7, needs to submit the following information to the bankruptcy court:

• List of creditors and their claims
• Details of monthly income and expenditure
• Details of the assets and liabilities of the debtor
• Any unexpired lease agreement, contracts that may be enforced and a general statement of financial affairs
• Details regarding the spouse's financial position regardless of whether partners are jointly filing for bankruptcy.

Once the petition is filed with the bankruptcy court, a trustee is appointed to oversee the liquidation of the non-exempt assets of the debtor. In case the assets are insufficient to settle the dues, the remaining amount is requited. Certain assets may be exempt in accordance with the provisions in the US Bankruptcy code. However, the debtor stands to lose most of the assets. Filing under Chapter 7 does not result in the debtor having to follow a repayment plan and pay off all the dues. Hence, many people prefer filing Chapter 7 bankruptcy.

Bankruptcy Chapter 11
As mentioned earlier, filing bankruptcy under Chapter 11 is an option that is pursued by companies as an alternative to liquidation. Both General Motors and Chrysler filed for bankruptcy under Chapter 11. General Motors emerged from Chapter 11 bankruptcy on July 10, while Chrysler exited bankruptcy in the month of June. Both companies underwent extensive reorganization that helped to reduce their liabilities significantly. In fact, General Motors is expected to turn profitable by 2011.

Bankruptcy Chapter 13
Not everyone is eligible to file under Chapter 7. The Bankruptcy Means test determines whether the individual is eligible to file under Chapter 7. People who fail the Means test will be forced to file bankruptcy under Chapter 13. Under Chapter 13 bankruptcy a debtor, who has a regular income, is obligated to discharge all the dues within a period of 3 to 5 years. Chapter 7, on the other hand, absolves the debtor the responsibility of discharging unsecured debts that cannot be settled by the liquidation of assets. Chapter 13 is often referred to as the wage earner's plan wherein the wage earner makes the scheduled payments to the trustee who hands over the payment to the creditors. Filing bankruptcy, under Chapter 7, generally costs $300 while filing under Chapter 13 costs much more. However, one must remember that filing under Chapter 7, does not eliminate a person's debt obligations. In fact, one's Individual Retirement Account may also be used to settle the dues. People may also lose possession of their home. Filing under Chapter 13 gives the debtor an opportunity to settle the debts under a different set of covenants. It allows the debtor to retain possession of the house, the retirement accounts and other assets, that have been used as collateral for the loans, as long as the dues are settled within a period of 5 years.

Filing bankruptcy should be the last resort for both individuals and corporations. Companies can consider commercial debt counseling and if that does not yield results, restructuring may be better than liquidating assets. Consumers should also try exploring feasible alternatives to bankruptcy. People should consider Consumer Credit Counseling Services (CCCS) or try and consolidate debts. Even borrowing from 401(k) to settle debts may be a better option than filing bankruptcy.