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Everything You Need to Know About Bankruptcy

Robert McKenzie, Tax Attorney

Types of Bankruptcies
Chapter 7. In a Chapter 7 bankruptcy, all of the debtor’s nonexempt property is liquidated and the proceeds distributed to creditors. Individual debtors receive a discharge of personal liability for pre-petition debts, subject to exceptions in §523, whether or not a proof of claim was filed or the debt was allowed under §502.727(b).

Chapter 13. Under Chapter 13, eligible individuals pay part or all of their debts over a three to five year period. The discharge in Chapter 13 applies to debts provided for in the plan or disallowed under §502. A “hardship” discharge under §1328(b) is subject to all of the exceptions in §523. A discharge under §1328(a) for a debtor who completes all payments under the plan is subject to a few of the exceptions in §523, but not the exceptions in §523(a)(1) and (7) for taxes and penalties.

Chapter 12. Under Chapter 12, eligible farmers pay part or all of their debts over a three to five year period. The debtor receives a discharge from debts provided for in the plan or disallowed under §502, subject to the exceptions in §523, either upon completion of payments under the plan or upon receiving a “hardship” discharge. §1228(a) and (b).

Chapter 11. In Chapter 11, the debtor proposes a reorganization plan and seeks approval of creditors. Confirmation of the plan discharges the debtor from debts arising prior to confirmation, except as provided in the plan or confirmation order, subject to the exceptions in §523.1141(d).

Plain Language Practice Tip! How to remember what the categories mean:

  • Chapter 7 They take your stuff and discharge most debts.
  • Chapter 13 You keep your stuff but must pay payments for 3-5 years when you get a discharge. (Only for individuals and there are dollar limitations on debt.)
  • Chapter 11 You keep your stuff and must make payments Taxes must be paid within 5 years. Used by individuals in big debt and companies. (Very high legal fees and other costs.)
  • Chapter 12 Farmers. Enough said.

Robert E. McKenzie is a partner of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrating his practice in representation before the Internal Revenue Service and state agencies. He has lectured extensively on the subject of taxation. He has presented courses before thousands of CPA’s, attorneys and enrolled agents nationwide. He has made numerous media appearances including Dateline NBC and The ABC Nightly News. Prior to entering private practice, Mr. McKenzie was employed by the Internal Revenue Service, Collection Division, in Chicago, Illinois. Since entering private practice, he has dedicated a major portion of his time to representation before the IRS. From 2009 to 2011, Mr. McKenzie was a member of the IRS Advisory Council, which advises IRS management. Mr. McKenzie serves on Arnstein & Lehr’s Executive Committee.

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