Different Forms of Relief Chapters 7, 11, 13

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15 issues and differences that may help you choose what type of relief you are seeking.

Involuntary Petition

An involuntary petition can be filed under Chapter 7 and Chapter 11. Involuntary petitions arise when a creditor asserts that the debtor is insolvent. This happens most frequently with businesses and is therefore found primarily in Chapter 11 cases.

The Automatic Stay

The automatic stay applies to all chapters in the bankruptcy code, however in chapter 13 it can protect certain co-debtors. In chapters 7 & 11 the court has equitable powers granted under §105 that can enjoin action against a co-debtor where the court feels it is appropriate.

Property of the Estate

In chapters 7 and 11, property of the estate includes the debtor's property at the time of petition. Property acquired after the petition is generally not considered part of the estate. In a chapter 13 case the estate includes the debtor's property at the time of the petition an property acquired after the petition. §541, §1306.

Disposition of the Property of the Estate

In a chapter 7 case, the estate property is liquidated and the proceeds are then distributed to the creditors. The individual debtor can claim exemptions for certain property under §522. Property can also be reaffirmed under §524 or redeemed under §722. In cases under chapter 11 or 13, the estate property is given back to the debtor upon the confirmation of the plan. This property can be limited though because it can be allocated to the payment of claims under §1124 or §1327. Exemptions can be claimed in chapter 11 and 13 plans but, they play a different role, they address minimum required payments under the plan.

Debtor's Postpetition Income

In a chapter 7 case, postpetition income is not effected, hence the "fresh start." In cases under chapter 13, the debtor's postpetiton disposable income goes towards the debtor's payment plan. §1322(a) and §1325(b).

Sources of Funding Payments to Creditors

In a chapter 7 case the funding for payments to creditors comes from the proceeds of the nonexempt property liquidated. §704 and §726. In a Chapter 13 case, the plan's payments are funded from the disposable income set forth in the debtor's plan. In some scenarios, property of the estate may be sold to create the funds necessary to make payments under the plan. §1322.

Administration of the estate and Operation of the Debtor's Business

In a chapter 7 case, the trustee administers the estate, in cases where the debtor has a business the trustee conducts the short term operation, but the business is liquidated as soon as possible. §§701-703 and §721. In a chapter 13 case, the trustee is appointed to perform supervisory functions as well as investigative work. If the debtor owns a business, then the debtor is allowed to continue running the business under the trustee's supervision. §1302 and §1304.

Converting the Case to Another Chapter

In a chapter 7 and 13 case the debtor has a general ability to convert the case to another chapter that the debtor is eligible under. §707 and §1307. Creditors can convert chapter 7 cases to to chapter 11 cases if they show cause. §706. A creditor can also convert a chapter 13 to a chapter 7 for cause. §1307.

Dismissal of the Case

In a chapter 7 case, the debtor's case may be dismissed by the debtor or by another party with interests only for cause. §707. Like wise a chapter 11 case may be dismissed by the debtor or another party with interests for cause. §1112. In a chapter 13 case the debtor has a right to dismiss with some restrictions attached. Other parties can also dismiss a chapter 13 debtor's case for cause. §1307.

Duration of the Case

A chapter 7 case is the most expeditious of cases. It is the goal to liquidate estate property and pay off the creditors as quickly s possible. §704. Chapter 11 cases have no statutorily defined time frame, but  if the chapter 11 is for an individual then the plan is for five years. §1129(a)(15). In a chapter 13 case, the payment plan's length depends upon how much the debtor is making in terms of income. If the debtor is below the median income then the maximum plan is three years, or with court approval five year. If the debtor is above the median income level then the maximum payment plan is five years. §1322. *This last provision has had some alterations due to the CARES act, cases that were initiated before the March passage can be extended to 7 years if Covid affected their ability to make payments according to the plan.

Minimum Level of Payments to Creditors

In a chapter 7 case there is no minimum level of payments because creditors are only allowed to the proceeds of the liquidation. The proceeds are then distributed to the creditors in their order of priority. Generally, secured claims are paid to the full extent of the collateral. Unsecured claims are ranked in a priority order. In a bankruptcy with little to no assets, general unsecured creditors can see no payment at all. §506, §507, and §726. Minimum payments under a chapter 11 plan are complex and case specific. In chapter 13 cases, secured claims are also entitled to payment to the full extent of the collateral. A debtor may surrender property to a creditor. However, if the debtor chooses to keep the collateral, the creditor retains its lien, and the payments made on the secured claim under the plan must equal the present value of the claim (the face value plus interest). Priority claims must be paid in full, and the payments made to general unsecured claims must at least be equal to the present value of what those claims would've received upon a liquidation. Additionally, the debtor is mandated to commit all their disposable income to plan for the the prescribed period (i.e. 3 or 5 years). §1322 and §1325.

Claim Classification

Claims in a chapter 7 case are classified as either secured, priority or general claims. In chapter 11 and 13 cases, the debtor has an ability to classify the claims of creditor as long as there is a rational basis and it is fair to all creditors. §§1122,1123,1129, and 1322.

Curing Defaults or Modifying Secured Obligations

In a chapter 7 case, the debtor is really reliant upon reaffirmation agreements when it comes to restructuring debts. §524. One of the major benefits of Chapters 11 and 13 is that the debtor is capable of restructuring and curing the default of secured obligation. §§123 and 1322.

Discharge

Corporations can not receive a discharge under chapter 7 , but can under chapter 11. §§727 and §1141. An individual can achieve a discharge under all chapters of the code. Types of debts that can be discharged and the timing of those discharges varies upon the chapter filed. §§523, 727,1141 and 1328.

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