Future Business Leaders of America (FBLA) Business Law Practice Exam

Which bankruptcy chapter permits individual debtors to reorganize their debts and develop payment plans?

1. Chapter 13 bankruptcy

2. Chapter 11 bankruptcy

3. Chapter 7 bankruptcy

4. Liquidation bankruptcy

The correct answer is: Chapter 13 bankruptcy

Chapter 13 bankruptcy specifically allows individual debtors to reorganize their debts while providing a framework for developing a repayment plan over a designated period. This option is particularly beneficial for individuals with a regular income who want to keep their property and catch up on missed payments. Under Chapter 13, debtors can propose a repayment plan to pay off all or a portion of their debts over three to five years. This enables them to manage their financial obligations more effectively while avoiding the more drastic measures that can come with liquidation options, as seen in other bankruptcy chapters. In contrast, Chapter 7 involves the liquidation of non-exempt assets to pay off creditors, which does not allow for a repayment plan or debt reorganization. Chapter 11 is primarily geared towards businesses seeking to reorganize, although individuals can use it too, it is more complex and typically involves larger debts. Liquidation bankruptcy is a term often associated with Chapter 7 and signifies the process where assets are sold to repay creditors, without offering individuals the chance to reorganize or develop a payment plan.