Q: What's the difference between liquidating and reorganizing debt?

A: Okay, so your question is directly related to the difference between a Chapter 7 bankruptcy and a Chapter 13. A Chapter 7 bankruptcy is a "liquidation"-type filing. All of your dischargeable debt is liquidated, meaning it is discharged and the creditors can no longer collect on it. You get to keep certain items of personal property (the "exempt" property), and you have the option to keep property secured by debt (e.g. your house and car). All the rest of your property is taken by the trustee to use to pay your creditors. Usually there is not much to pay them, and the remaining debts are then discharged. Businesses going through Chapter 7 get closed down, with all of their assets sold to pay creditors.

Most other types of bankruptcy filings, and in particular Chapter 13 (but also Ch. 9, 11, 12) are restructurings or reorganizations. In this process, you (or the business) keeps most of its property, and goes into a payment plan, paying creditors an arranged amount each month through the entire bankruptcy process. After paying for a certain amount of time (3 or 5 years, usually), then all of the remaining dischargeable debt is discharged. So, the basic difference is that a reorganization has you paying a portion of your debt to all of your creditors, with the remainder then discharged. Some types of debt that are not dischargeable in Chapter 7 are in Chapter 13.

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