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Bankruptcy Law: Chapters 7, 11, and 13 Explained

Federal & State Law Editorial Team

Overview of the federal bankruptcy system including Chapter 7 liquidation, Chapter 11 reorganization, Chapter 13 adjustment of debts, and the automatic stay.

Bankruptcy Law Overview

The Bankruptcy Code

Bankruptcy is governed exclusively by federal law (Title 11 of the U.S. Code) and administered by specialized bankruptcy courts.

Chapter 7: Liquidation

  • The most common form of consumer bankruptcy
  • Non-exempt assets are sold by a trustee to pay creditors
  • Most remaining unsecured debts are discharged (eliminated)
  • Means test: Income must be below state median or pass a calculation showing inability to pay
  • Cannot file again for 8 years after a previous Chapter 7 discharge
  • Timeline: Typically 3-4 months from filing to discharge

    • Chapter 13: Adjustment of Debts

  • Available to individuals with regular income
  • Debtor proposes a 3-5 year repayment plan
  • Allows you to keep property (including a home facing foreclosure)
  • Plan payments based on disposable income
  • Any remaining unsecured debts are discharged after plan completion
  • Cannot file again for 2 years after a previous Chapter 13 discharge

    • Chapter 11: Reorganization

  • Primarily used by businesses to restructure debts while continuing operations
  • The debtor proposes a plan of reorganization
  • Creditors vote on the plan; the court can "cram down" a plan over objecting creditors
  • Expensive and complex — attorney fees often exceed $25,000
  • Subchapter V provides a streamlined process for small businesses (debts under $7.5 million)

    • The Automatic Stay

    Filing any bankruptcy petition immediately triggers the automatic stay:

  • Stops all collection efforts, lawsuits, garnishments, and foreclosures
  • Creditors who violate the stay can be sanctioned
  • Some exceptions: criminal proceedings, certain tax actions, domestic support obligations
  • Creditors can ask the court to lift the stay for cause

    • Non-Dischargeable Debts

    Certain debts survive bankruptcy:

  • Student loans (unless undue hardship is proven — very difficult standard)
  • Recent income taxes (within 3 years)
  • Child support and alimony
  • Debts from fraud, embezzlement, or willful injury
  • Government fines and penalties
  • DUI-related debts