The options for filing bankruptcy are divided into different “Chapters” based on where they are outlined in the U.S. Bankruptcy Code. For personal bankruptcy there are two options, Chapter 7 and Chapter 13. For business bankruptcy, there are two main options that are most commonly sought, business Chapter 7 and Chapter 11. There are other Chapters for other demographics, but we will focus on the two main types for personal and business.
Chapter 7 is the most commonly sought form of personal bankruptcy. It allows for a quick elimination of debts that can often be resolved in a matter of months. Nearly all unsecured debts can be discharged in Chapter 7, with a few exceptions. Secured debts like mortgages and car loans are better managed in a Chapter 13 case. The drawback to Chapter 7 is the possible liquidation of some non-essential assets and the strict qualification criteria, which makes it difficult for people with certain income levels to qualify.
Chapter 13 offers a discharge of a greater variety of debts, including secured debts like mortgages. Because debts are repaid rather than satisfied, Chapter 13 offers a better potential for quick future credit than a Chapter 7 case. The main drawback to a Chapter 13 case is the timeline, which generally has debts discharged within three to five years.
Chapter 7 can also be an option for some businesses. Like the personal Chapter 7, filing for a business is entering it into a liquidation scenario. In other words, the business debts will be resolved through the liquidation of remaining assets and the business operation will be dissolved. This is the type of bankruptcy that occurs when a company goes “out of business”.
Chapter 11 is a type of reorganization bankruptcy. Similar to a Chapter 13, a company that files for Chapter 11 is allowed to restructure their debts, make payments over time and continue operations. Most business bankruptcies begin as Chapter 11 cases and work towards debt relief by offering a partial buyout of ownership, obtaining funding to cover debt obligations or simply boosting profitability.