Chapter 7 vs. Chapter 13
Chapter 7
Chapter 7 bankruptcy is commonly known as a liquidating bankruptcy or straight bankruptcy and usually lasts about 120 days.
The filing of a Chapter 7 bankruptcy petition creates an estate comprised of all assets owned by the Debtor. Nonetheless,
the Debtor retains the right to exempt certain assets from the bankruptcy estate and shield them from the bankruptcy
process and possible sale by a trustee. In most cases the Chapter 7 Debtor will be able to exempt all of his/her assets
under applicable Texas or Federal law. However, if there remain certain assets that do not qualify for an exemption, the
Chapter 7 bankruptcy trustee will sell those non-exempt assets. The proceeds from the sale of those non-exempt assets are then
distributed amongst the Debtor’s creditors.
The objective or goal of a Chapter 7 bankruptcy is to provide the honest Debtor with a fresh start. This objective, under
Chapter 7 of the Bankruptcy Code, is accomplished by granting the Debtor a discharge in exchange for the sale of all
non-exempt assets as discussed above. This bankruptcy discharge relieves the Debtor from any obligations due and owing
his/her unsecured creditors (exceptions are noted below). In other words, upon successful completion of a
Chapter 7 bankruptcy case, the Debtor will no longer
be legally obligated to pay any: (1) credit card debts; (2) medical bills;
(3) any monies due and owing any secured creditor resulting from the repossession or surrender of the secured creditor’s
collateral (i.e. a car, boat, or real property); and (4) personal loans to friends and/or family members. While
technically, a Chapter 7 Debtor is also discharged from having to repay any secured obligations (a car loan and home mortgage
being the most common), the secured creditor retains the right to repossess or foreclose upon those assets in the event of
non-payment. As such, if there are certain assets which a Debtor wishes to retain and which are the subject of a secured loan,
the Debtor must continue to make payments to that creditor even after the discharge.
A bankruptcy discharge under Chapter 7 is not, however, without limitations. The Chapter 7 bankruptcy discharge does not
eliminate debts for most taxes, student loans, family support obligations or debts from fraud, intentional injuries or
damages for driving under the influence of drugs or alcohol.
Chapter 13
A Chapter 13 bankruptcy petition requires the Debtor to formulate a plan of reorganization under which the Debtor proposes
to re-pay his/her Creditors all or a portion of the debt owed to them over a period of three to five years. In so doing,
the honest Debtor is entitled to retain all assets, exempt or otherwise. The Chapter 13 Bankruptcy Plan requires the Debtor
to make monthly plan payments to a bankruptcy trustee for the duration of the plan. The bankruptcy trustee, in turn,
distributes those plan payments amongst all of the Debtor’s creditors pursuant to the terms of the Chapter 13 Bankruptcy Plan.
The Chapter 13 plan payment is intended to address the obligations of the Debtor’s: (1) unsecured creditors, (2) tax obligations;
(3) arrearage on secured assets the Debtor wishes to retain; and (4) vehicle loans or other forms of short term secured debt.
Note that in most cases long-term secured liabilities like a mortgage, will be paid outside of the plan.
The amount of the Chapter 13 Bankruptcy Plan payment is the difference between the Debtor’s income and the Debtor’s
monthly expenses (those expenses reasonably necessary for the support of the Debtor and the Debtor’s dependents). This
difference constitutes the Debtor’s surplus income.
There are many options available to a Chapter 13 Debtor that are not available to a Chapter 7 Debtor. For example if a
Debtor is behind on his/her mortgage payment, those arrears can be cured within the Chapter 13 Plan thereby permitting the
Debtor to keep the home. In addition, many secured claims need only be paid to the extent of the value of the property
securing the claim (home mortgages have special rules in this regard). Lastly, Chapter 13 is an ideal vehicle for paying
off back taxes and preventing any further IRS levies or garnishments.
Comparison Chart
SUBJECT
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CHAPTER 7
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CHAPTER 13
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Qualification to file a Bankruptcy Petition
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Married or unmarried individuals, corporations, and partnerships may file.
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Married or unmarried Individuals owing not more than $307,675 of unsecured debt and not more than $922,975 of secured debt. No partnerships or corporations allowed.
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Consideration for a Bankruptcy Discharge
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Liquidation of all non-exempt property.
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Completion of all monthly plan payments and other obligations as required by the chapter 13 plan.
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Length of time in Bankruptcy
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Approximately four months from the filing date.
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From 36 months to 60 months.
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Payment to Creditors
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Creditors will be paid only if there are non-exempt assets to be liquidated and then only from the net sales proceeds.
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Surplus income as established in the chapter 13 plan and, if provided for, the net sales proceeds of any other assets sold by the Debtor.
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Order in which Creditors are Paid
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Priority unsecured claims such as taxes will be paid first with any remainder to be paid pro rata (i.e. same percentage paid) to all general unsecured creditors.
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The trustee will pay creditors in the following order: (1) unsecured priority unsecured claims (typically taxes); (2) secured creditors to be paid through the plan; and (3) general unsecured creditors. Secured Creditors paid outside of the plan receive their regular monthly payment directly from the Debtor.
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Benefits
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Upon successful completion the Debtor’s unsecured obligations will be discharged. As for those obligations securing property the Debtor wishes to retain, the Debtor must continue to make regular monthly payments.
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Permits the Debtor to retain a house or other secured assets the obligations of which are substantially in arrears. Certain secured claims (typically not a home mortgage) need only be paid to the extent of the value of the collateral. Benefits of a debt consolidation loan with no interest and substantial reduction of principal. Within the context of the plan, discharge certain obligations not otherwise dischargeable under a Chapter 7 bankruptcy case.
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Credit Bureau
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Chapter 7 notation remains on credit bureau for 10 years from the petition date.
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Chapter 13 notation remains on credit bureau for 10 years from the petition date.
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Boyd•Veigel, P.C., is proud to represent clients in Plano, Allen, Frisco, McKinney, The Colony, Lewisville, Greenville,
Dallas, Richardson, Arlington, Addison, Mesquite, Rockwall, Carrollton, Sachse, Collin County, Dallas County, Denton County, Hunt County,
and all surrounding areas.
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