Chapter 7 Bankruptcy is also known as a “straight” or “liquidation” bankruptcy. In a chapter 7, if the debtor qualifies to file based on his or her “inability” to pay debt, non exempt assets will be sold and given to creditors and most remaining debt then will be “wiped” away (discharged).
Chapter 13 Bankruptcy is also known as a “wage earner plan” or personal “reorganization”. In a Chapter 13 bankruptcy, the debtor with a “regular” income, is able to keep non exempt assets and pay some portion of the debt over a 3 year to 5 year period. Sometimes the debt paid is a small amount and sometimes it is larger, depending on a number of different factors including the amounts of the debtor’s income and budget, types and amounts of debts, and the debtor’s non exempt asset value.
Certain debts that cannot be discharged in Chapter 7, can be discharged in Chapter 13.
Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.
Chapter 11 bankruptcy is a reorganization case as well, and is typically only used by a debtor who doesn’t qualify for either a chapter 7 or chapter 13 bankruptcy or a business entity.
In Chapter 11, the debtor will typically retain possession of assets and continue to operate the business.
The debtor devises a plan of reorganization which, if accepted by creditors can bind both the debtor and the creditors to its terms. Plans commonly call for repayment out of future profits, or a sale of assets.