Reorganization bankruptcies are much less common. The basic reorganization case is a Chapter 11 bankruptcy. These cases are usually filed by large corporations or wealthy individuals. This is the kind of bankruptcy filed by General Motors and Chrysler back in 2008, and locally by Doug Vaughan in 2010. Streamlined and less expensive reorganizations exist for wage earners (Chapter 13) and family farmers (Chapter 12). Reorganizations are also available for government units (Chapter 9) and foreign corporations (Chapter 15). But those are pretty rare. Most people, if they need a reorganization bankruptcy, choose Chapter 13, the cheapest and most streamlined version.
I see two main reasons why people choose Chapter 13 cases instead of a cheaper, quicker, easier Chapter 7 case. First, they aren't eligible for Chapter 7. This could be because they filed a previous Chapter 7 case within 8 years, or because their income is too high for Chapter 7 and they fail the "means test". I could talk about the means test for days, but that is the subject of another post. The second reason is people who are behind on their mortgages but still want to save their homes from foreclosure. Chapter 13 allows you to force the mortgage company to let you catch up slowly. Given the horrible abuses of the well intended mortgage modification programs by the big banks, and the generic unresponsiveness of large financial institutions, it can be extremely appealing to file a Chapter 13 and force the mortgage company to follow your instructions for once.
All bankruptcies start out the same way, with 50-60 pages of disclosure about your finances. The price of a bankruptcy discharge is full disclosure. We will list everything you own, everyone you owe, answer a lot of narrative questions, provide a projected future budget and complete the means test. For Chapter 7 cases, that is almost everything you have to do (there is a brief meeting of creditors to attend, and the rare possibility of a challenge to your discharge). For reorganization cases you start with these disclosures, but then you have to file a plan and start making payments into the system. Those payments are used to repay creditors in part or sometimes in full according to a complicated formula of priority. So the main difference between Chapter 7 cases and Chapter 13 cases is three to five years of payments.
Chapter 7 is clearly the most bang for the buck. Even a modest plan payment under Chapter 13 of $500 per month is a total payout to creditors of $30,000 over five years. If it is a close call whether you are eligible for Chapter 7 or not, you can see that the stakes can be pretty high. Chapter 13 cases are particularly hard on self employed people or folks with seasonal changes in income because Chapter 13 really is intended for steady, regular income earners. But properly designed, a Chapter 13 reorganization is an invaluable tool for people in certain situations.
