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Chapter 7: Often called Liquidation, is a procedure by which a trustee may take over the assets of the debtor’s nonexempt estate assets, reduces them to cash, and makes distributions to creditors. The trustee’s actions are subject to the debtor’s right to retain certain exempt property as well as the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” Ordinarily, an unsecured creditor (such as a credit card lender or someone who provided services such s medical services), will get a distribution from the bankruptcy estate only if the case is an “asset case”. In order to get a distribution in an asset case, the creditor must file a proof of claim with the bankruptcy court. In most chapter 7 cases, the debtor receives a discharge that releases him or her from personal liability for certain dischargeable debts just a few months after the petition is filed. A debtor may even keep his or her car if the payments are current and if the equity in the car meets the requirements of the law. A debtor may keep nonexempt assets whose value exceeds that which is allowed by law, by paying the trustee the nonexempt value following the discharge. A discharge under chapter 7 may be granted within several months after filing the case.
Chapter 13: Often called Adjustment of Debts of an Individual with Regular Income, is suited for an individual debtor who has a regular source of income. Chapter 13 offers certain advantages over chapter 7 because it enables the debtor to keep a valuable nonexempt asset, rather than be subject to liquidation under chapter 7. Under Chapter 13, a debtor may even be able to keep his or her home despite falling behind on mortgage payments because it allows the debtor to propose a “plan” to repay creditors over time, usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader under chapter 13 than the discharge under chapter 7 in that more debts can be dealt with in the plan.
The “means test” is used to determine whether an individual consumer debtor qualifies for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.
Chapter 7 and Chapter 13
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