What Is the Difference Between a Chapter 7 and a Chapter 13?

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Chapter 7 is sometimes called a liquidation bankruptcy.  The debtor is allowed to keep certain “exempt” assets.  Most debtors, but not all, lose no assets as part of their Chapter 7 case.  If   assets remain to be distributed from the debtor’s estate, the trustee liquidates the assets (reduces them to cash) and allots the proceeds to creditors who file a “proof of claim” with the bankruptcy court.  Many debtors prefer a Chapter 7 filing because their case is resolved more quickly and because in many cases they will not have to make any payments to  the trustee.  The trustee will likely object to filings from debtors with high enough incomes to be able to pay a significant part of their debt in a Chapter 13.

Chapter 13 is designed to ‘adjust’ the debts of a debtor with regular income.  The debtor proposes a plan to repay part or all of the debtor’s debts.  The plan normally consists of 36 to 60 payments over 3 to 5 years and must be “confirmed” by the court.  Many debtors prefer to file a Chapter 13 case because they may be able to keep more property or may want time to repay a creditor for an assortment of reasons.  It may be possible to modify the terms of a secured loan — to reduce interest or change the dates of payments. Wholly unsecured second or third mortgages MIGHT be written off entirely.  Also, a Chapter 13 can protect co-signers to some degree and can discharge some debts which can not be discharged in a Chapter 7 case.

Each Chapter has advantages depending on the individual debtor’s circumstances.

 

CHAPTER 7 CHAPTER 13
Eligibility.  If debt is predominately consumer debt and income above state median for debtor’s family size, debtor must complete “means test” regarding income and expenses over last 6 months.  If cannot pass means test, filing presumed abusive.  No means test necessary if most debt is NOT consumer.  11 U.S.C. §707(b).  No limit for debtor’s income or amount of debt.  Artificial entities such as corporations can file but not certain railroad, insurance companies,  banks and a few other entities. But see Discharge, below. Eligibility.  Must have regular income, unsecured debt of less than $383,175 and secured debt of less than $1,149,525.  Only natural individuals, NOT artificial entities like corporations, are eligible.Plan.  Plan must last at least 36 months. If income above median and debtor can NOT pass means test, plan must last 60 months. Must present plan paying disposable income (gross less reasonable, necessary expenses) to trustee to make plan payments for 36 to 60 months. Plan must be feasible and pay all secured debt (if debtor keeps collateral) and priority debts (eg. taxes, alimony, support) unless the creditor(s) does not object.
Duration. Typically lasts a little over 90 days from filing to discharge. Duration. Normally lasts a little more than 36 or 60 months from filing to discharge.
Discharge. NO discharge of debts for1. Willful and malicious torts  ;2. Marital property settlement debts   ;3. Debts from a prior chapter 7 case in which a discharge was denied;4. Fines, penalties or forfeitures for governmental units (tho not compensation for monetary loss), whether or not convicted of a crime; and

5. Debts incurred to pay income taxes which cannot be discharged.

{Other debt not dischargeable in 7 or 13— See What Debts Can Be Discharged?}

— Only individuals -not corporations- receive discharge. 11 U.S.C. §727(a)(1).

Discharge.Can discharge debts for all debts that can be discharged in Chapter 7 PLUS:1. Willful and malicious torts;2. Marital property settlement debts – as in Chapter 7 NOT including domestic support obligations (alimony & child support);3. Debts from a prior chapter 7 case in which a discharge was denied;4. Fines, penalties & forfeitures for a government unit if not compensation for loss (other than tax penalty); and

5. Debts incurred to pay income taxes which cannot be discharged.

If cure for debt is in plan and payments remain on debt after completion of plan, debt is not dischargeable.  11 U.S.C. §1322(b)(5).

Foreclosure. Can delay foreclosure by stopping Sheriff’s sale.  Foreclosure can restart -from the resetting of a new Sheriff’s sale- if stay lifted (See Can Bankruptcy Save My House From Foreclosure) or after discharge is granted or denied, or case is dismissed or closed (normally a little more than 90 days after filing). Foreclosure. Can delay foreclosure by stopping Sheriff’s sale.  Foreclosure can restart -from the resetting of a new Sheriff’s sale- if stay lifted (See Can Bankruptcy Save My House From  Foreclosure).  If property surrendered, foreclosure may restart.
Mortgage Arrears. No help in paying off overdue mortgage payments, except that debts which are discharged will free up money that can be used to make mortgage payments. Mortgage Arrears. Overdue mortgage payments can be made up over time, perhaps over 2, 3 or even 5 years in some cases.  During repayment of arrears in plan, late fees and interest on arrears stop and regular house payments are made outside of Chapter 13 plan.  Debtor has more flexibility in dealing with wholly unsecured second mortgages.  In some cases the claims of holders of second mortgages or home equity lines of credit can be greatly reduced or liquidated.
Vehicle Surrender. Vehicle that is collateral for loan can be surrendered and debt discharged. Vehicle Surrender. Vehicle that is collateral for loan can be surrendered and debt discharged.
Vehicle Kept. Car can be redeemed by paying secured creditor the value of the vehicle.  Otherwise, the vehicle that is collateral for loan can be kept, but debt may then have to be reaffirmed.  If the vehicle is kept and not redeemed, the secured debt will have to be paid or vehicle can be repossessed. Vehicle Kept. Car can be redeemed by paying creditor with lien the value of the vehicle.  Otherwise, the vehicle that is collateral for loan can be kept, but the debt will have to be paid.  Plan can give debtor time to pay off arrears on vehicle.  If interest rate is high, debtor may modify the loan to reduce the interest rate.  If loan more than 910 days old, debt may be written down to the value of the vehicle.
Reaffirmation. If secured debt not reaffirmed creditor might seek collateral even if payments are current. Reaffirmation. Debt on secured property may avoid reaffirmation since plan will govern rights of secured creditors to collateral.
Old Taxes. Tax debts which are old enough (with a few exceptions) can be discharged.  For instance, many income tax obligations due and payable for more than 3 years can be discharged. Different time periods for different types of taxes. Old Taxes. Tax debts which are old enough (with a few exceptions) can be discharged.  For instance, many income tax obligations due and payable for more than 3 years can be discharged. Different time periods for different types of taxes.
Recent Taxes. Recent tax obligations generally can NOT be discharged.  Obligations can NOT be modified in Chapter 7.   Discharge of other debts can be granted even though recent tax debts remain unpaid. Recent Taxes. Most recent tax obligations can be paid off through the plan.  Interest and penalties on tax arrears stop.  Older tax obligations can often be discharged with payment of only a small percentage of the obligation.  All recent taxes MUST be paid through the plan or tax authority must accept payments provided by the plan.
Domestic Support.  Alimony (spousal maintenance), family support and child support can NOT be discharged.  Automatic stay may stop SOME but not all actions to enforce domestic support obligation after the case is filed until discharge or discharge is denied or case is dismissed or closed. Domestic Support.  Alimony (spousal maintenance), family support and child support can NOT be discharged. However, domestic support obligations, including arrears, can be provided   paid in a Chapter 13 plan; they can even be paid more than other unsecured creditors. Payments can be an expense, reducing required amount of plan payment. Automatic stay may stop SOME but not all actions to enforce domestic support obligations.
Student Loans.  Student loans can NOT be discharged unless the debt imposes an “undue hardship” on debtor. Debt cannot otherwise be provided for in Chapter 7 case. Student Loans.  Student loans can NOT be discharged unless the debt imposes an “undue hardship” on debtor. Debt can be paid in plan but cannot be preferred over other unsecured debt unless a separate class can be justified, eg. possibly as a co-signed debt. Loan payments may be an expense which can reduce plan payment.
Cosigners.  No special treatment of cosigners.  If debt is not discharged or paid by debtor, cosigner (guarantor) of loan can be held accountable for debt by creditor. Cosigners. Cosigners can be protected from creditors by paying the debt in full in plan. Debtor permitted to create separate class and prefer payment to co-signed debts in plan. Even interest on cosigned debts may be paid in plan.
Credit Reports. Can be reported for 10 years from filing. Credit Reports. Can be reported for 7 years from filing.
Non-Exempt Property.  Non exempt property (if part of bankruptcy estate – See What Is the Bankruptcy Estate?) generally sold to pay creditors unless debtor and trustee agree on deal to purchase property. Non-Exempt Property. Debtor can keep non-exempt property if general unsecured creditors receive as much from the plan as they would get in Chapter 7.
Attorney Fees. Attorneys normally receive fees prior to filing.  Typically less costly than Chapter 13 because completed more quickly and no ongoing administration and no plan will have to be modified. Attorney Fees. All or part of attorney fees commonly spread out over time through plan.  Attorney fees generally paid earlier in plan than most other debts.  Normally more costly than Chapter 7 because longer to complete, there is ongoing administration and plan must be prepared and often modified later.
Trustee Fees. Trustee collects $60 fee for administering each case. Trustees are also paid a commission from distributions to creditors of liquidated assets recovered in cases:25% of the first $5,000; 10% of the next $45,000; 5% of the next $950,000; and 3% of the balance. Trustee Fees. Trustee is paid a percentage of funds distributed to creditors. Capped by law at 10%. In Minnesota the percentage is presently less.

 

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