Chapter 7 v. Chapter 13

Chapter 7 Liquidation Plan and Chapter 13 Reorganization Plan provide two different types of protection for debtors and their escalating debts.  Both these bankruptcy provisions provide the debtor with an opportunity for a fresh start.  There are so many factors that influence in determining whether Chapter 7 Liquidation Plan or Chapter 13 Reorganization Plan is more appropriate for a debtor.  The major influencing factors are:

  1. Debts Discharge:   There are 17 types of debts that are not dischargeable under Chapter 7.  Under Chapter 13, debts for child support, maintenance, or alimony; debts for death or personal injury related to intoxicated driving, debts for criminal fines and compensation, certain debts for student loans, debts not included in the plan, and installment debts maturing after the expiry of the plan are not dischargeable.  In certain circumstances, some substantial debts are not dischargeable under Chapter 7 and the debtor can prefer Chapter 13for such debts.  Similarly, if a debtor filed a Chapter 7 discharge and s/he was not eligible for such an order for the last six years, such a debtor can opt Chapter 13 discharge.
  2. Retaining the Secured Property:  In Chapter 13, the debtor has a right to retain the real property on a secured debt (in a default) such as a home mortgage or an automotive lien over a reasonable period of time.  During the repayment plan of that secured property, the creditors are not permitted to initiate any foreclosure or collection effort.  In Chapter 7 liquidation process, the curing of defaults in a secured debt is not possible.  However, under Chapter 7 the actual debtor is allowed to convert or schedule liens against a number of exempt personal property.
  3. Retaining Non-exempt Assets:  In Chapter 7, the debtor has no right to retain any non-exempt real assets and s/he has to turn all such properties to the trustee.  However, Chapter 13 permits the debtor to retain all non-exempt property with him/her if major payments are made to the unsecured creditors.  Therefore, most debtors who own a good deal of assetse prefer Chapter 13 as it permits to hold large equity with him/her.
  4. Debtor’s Revenue: Chapter 13 plan demands regular monthly income for a debtor in default to make up his/her repayment plan.  If a debtor is unemployed or devoid of any regular income, a Chapter 13 repayment plan is not practical.  In contrast, if a debtor has sufficient means or revenue to repay his/her major portion of debts within a reasonable period of time and plea for Chapter 7 liquidation, the court may dismiss such cases on the basis of abuse of Chapter 7.
  5. Debtor’s Attitude: Chapter 13 entertains debtors with genuine and practical desire to repay all or most of his/her unsecured debts; whereas Chapter 7 entertains the debtors who wish to repay only one or two debts.
  6. Time and Expense: Generally, Chapter 13 repayment plans are meant to discharge in 36 to 60 months; whereas Chapter7 liquidation plan finishes and discharge in around six months.  Chapter 13 involved additional expenses such as attorney’s fees and administration expenses than Chapter 7 cases.  If a debtor is unable or unwilling to make such payments along with the monthly installments, Chapter 13 is not a better option for debt settlement.

Inside Chapter 7 v. Chapter 13