Liquidation, is the most common type of bankruptcy. Liquidation involves the appointment of a trustee, who collects the nonexempt property of the debtor, sells it, and distributes the proceeds to the creditors. Chapter 7 cannot be used to get rid of recent taxes, child support, alimony, student loans, drunk-driving judgments, criminal fines or restitution, or debts that involved fraud or intentional wrongdoing.
Chapter 7 involves liquidation of all non-exempt assets (usually sold by a court-appointed official or turned over to creditors) and the discharge of debts for exempt assets. [What is considered exempt and non-exempt varies between the federal and state governments, and state regulations may prevail over the federal.]
If you own a business or corporation, Chapter 11 is a reorganization proceeding to consider. There are special circumstances you have to meet. Some individuals whose debts are larger than the limits of Chapter 13 may file Chapter 11.
In Chapter 11, the debtor usually remains in possession of assets and continues to operate any business, subject to the oversight of the court and the creditors committee. You propose a plan of reorganization to the creditors, who vote on it. If the majority accept it, your plan is confirmed by the court and becomes binding to you and your creditors. Plans can call for repayment out of future income or sales of some or all of the assets.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affects whether an individual can file for Chapter 7 or Chapter 13 bankruptcy. The new law: