Chapter 7 Vs. Chapter 11 Personal Bankruptcy
Many people file for personal bankruptcy as a last alternative, when they become so burdened with debts that it becomes the last solution for getting out of their financial quandary. The U.S. Bankruptcy Code comprises the primary regulations for bankruptcy. The law allows states to make minor changes when it comes to local court procedures and the amount of personal and real property, or "exemption," that filers can keep out of the hands of creditors.
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Significance
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While both parties who file for Chapter 7 and Chapter 11 usually find themselves overwhelmed by debts, the people who file Chapter 7 usually have very few assets. Alternatively, the individual who choose Chapter 11 typically have a substantial amount of personal and real property. This type of bankruptcy allows them to formulate a repayment plan to pay creditors while under the protection of the court.
Function
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Chapter 7 filers must "qualify" as discussed in Section 3. However, the basic procedures for filing bankruptcy involves the same steps in both cases. Debtors must complete a pre-bankruptcy credit counseling session within 180 days prior to filing. They go to the clerk's office of the U.S. Bankruptcy Court where they live and filing a voluntary petition of bankruptcy and various financial documents, including schedules, assets and liabilities, creditors list and a statement of financial affairs.
Filing bankruptcy requires a fee of $299 for Chapter 7 and $1,039 for Chapter 11 (as of June 2010). The court sends out a notice to the creditors prohibiting them from taking or continuing any collection actions. A court-appointed trustee takes over the case file and debtor's assets.
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Chapter 7
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Filers must pass the means test, which compares the household's monthly income for the past 180 days to the median income for the same family size in their state. The formula subtracts expenses from the monthly income to arrive at the family's "disposable monthly income." If the disposable monthly income allows the family to enter a plan to repay creditors over a maximum five-year period, the family cannot qualify for Chapter 7. The debtor may choose Chapter 13 bankruptcy, which works similar to Chapter 11.
Chapter 11
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Personal households with $336,900 in unsecured liquidated debts and/or $1,010,650 in secured liquidated debts debt exceed the limits allowed under Chapter 13 (as of June 2010) and must file for Chapter 11. Debtors must provide a written disclosure statement to the court along with a reorganization plan for paying off the creditors over a three- to five- year period. Once approved by the court, the plan binds the creditors and the debtor and has precedent over previous agreements
Trustee
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Once the Chapter 7 debtor files, a "341 meeting" takes place with the trustee (and creditors) to discuss financial circumstances. Debtors may keep personal and real property up to the amount permitted under federal or state laws. The trustee collects excess assets, liquidate them, and distribute the proceeds to the creditors. Debtors must complete a two-hour financial management course before the court discharges the debts. Debtors remain obligated for certain obligations, including alimony, child support, federal loans, some taxes and secured debt.
Denial of discharge occurs in cases of fraud, improper action or refusal to cooperate with the court. In Chapter 11 cases, the trustee oversee the debtor's reorganization plan until discharged. The debtor makes payments to the trustee who pays the creditors. The debtor must obtain approval from the trustee before obtaining credit or taking steps that may affect her ability to adhere to the plan.
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References
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