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Differences between the Chapters of Bankruptcy

Difference Between Chapters of Bankruptcy

Declaring bankruptcy in New Jersey, or anywhere in the US, is a major decision that can have long-term consequences. This makes it important to conduct in-depth research before going forward. For instance, debts incurred in good faith are generally discharged under bankruptcy, with exceptions such as child support, alimony and student loans. This could be possible under certain chapters.

“Filing for bankruptcy” is a blanket term under the US Bankruptcy Code. There are many sections of the code otherwise known as “chapters,” which outline how your debt will be discharged. Here’s a look.

Chapter 7 Bankruptcy

The most basic form of bankruptcy is Chapter 7, also called “liquidation bankruptcy.” This involves the liquidation of an individual’s assets to pay off their debts to creditors. However, individuals are allowed to keep exempt property. For businesses that file for Chapter 7, the court appoints a trustee that operates the business and takes care of asset liquidations and proceeds.

It’s interesting to know that the number of Chapter 7 bankruptcies in 2020 was the lowest in 35 years, due to the stimulus measures launched by the US government to bring capital into the markets, thereby delaying bankruptcy filings, according to an article on Intrado GlobeNewswire.

Chapter 9 Bankruptcy

This is for municipalities, counties, school districts, towns and cities. These organizations can seek protection from creditors while being given time to adjust their debts. The city of Detroit filed for bankruptcy in 2013, the largest city to ever do so, says an article on USA Today.

Chapter 11 Bankruptcy

Available to both individuals and businesses, this is known as a “reorganization” plan. In contrast to Chapter 7, here the debtor can retain control of business functions and doesn’t need to sell off all assets. Chapter 11 bankruptcy allows a business to resume operations, and come out of debt as a healthy business. Businesses can negotiate terms of debt repayment, like interest rates and payment values.

Chapter 12 Bankruptcy

Designed for family farmers or fishermen, this plan allows debtors to craft a debt repayment plan that they can use to repay creditors over the next 3 to 5 years.

Chapter 13 Bankruptcy

This is a “wage earner” plan. Individuals with a regular income and a permissible limit of secured and unsecured debt can be allowed to develop a plan to pay back their debts, in parts or in whole. Unlike Chapter 7, this section allows individuals to avoid foreclosures on their homes.

Many people use Chapter 13 to delay or reduce student loan repayments. However, student loan is a non-dischargeable debt, and can be discharged only if the debtor proves that they are going through an unprecedented crisis, according to an article on Market Realist.

Make sure to appoint a qualified and experienced bankruptcy attorney to evaluate your eligibility under the different chapters of the US Bankruptcy Code and guide you throughout the process.

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