It’s a common question: What’s the difference between chapter 7 and 13? Which should I file? We’ll explain. But while we’re at it, we may as well give an overview of chapter 11 as well.
Chapter 7, chapter 13 and chapter 11 each has a unique roll in bankruptcy. Here’s the difference between chapter 7 and 13. We’ll also then describe chapter 11.
Chapter 7 is called a liquidation chapter. This chapter is available to both individuals and entities, and is appropriate when a debtor is unable to restore their financial condition. In a chapter 7 case, when assets are available, the debtor’s estate will be liquidated by a trustee. Assets that are not otherwise exempt will be sold by the trustee, and the proceeds distributed to creditors. For most chapter 7 debtors however, there are no non-exempt assets to be sold, and thus the debtor retains all of his or her property. Through this process, the chapter 7 debtor will discharge (i.e. wipe out) liability to most, if not all, creditors. Completion of this process is referred to as the debtor’s “fresh start.”
Chapter 13 is available only to individuals (entities such as LLCs or C Corporations cannot utilize this chapter). An individual who generates income, but has become overwhelmed by debt payments, can utilize chapter 13 to repay a reasonable portion of their debts over a period of time. This is the key difference between chapter 7 and 13 – in chapter 13 the debtor will make some level of monthly payment for a set period of time. The amount of the payment is set forth in the debtor’s chapter 13 plan. A chapter 13 trustee administers this process – meaning that the debtor makes a single payment to the trustee, and then the trustee allocates (and pays out) that amount to the various creditors. These monthly payments generally last from 36 to 60 months. At the end of the process the individual is relieved from paying the unpaid portion of his or her unsecured debts (i.e. those remaining debts are “discharged”). The total percentage paid to the various creditors depends entirely on each debtor’s individual situation.
The most common reasons to file chapter 13 instead of chapter 7:
- To adjust the interest rate, repayment period, or principal balance owed on a vehicle loan;
- To cure arrearages under a mortgage;
- You make too much money to be able to discharge all your debts;
- You have non-exempt assets which a trustee would try to sell in chapter 7; or
- You have priority tax debt (which cannot be discharged), and you need more time (up to 60 months) in order to pay it off.
Similar to chapter 13, chapter 11 allows for a “reorganization” of the debtor’s affairs. This chapter is often used to preserve an operating business, or for individuals who own multiple parcels of investment property. There are frequent set of common causes for business filings, where bankruptcy can provide a real benefit.
Chapter 11 is the only reorganization chapter available to corporations and partnerships (because a chapter 13 reorganization is available only to individuals). Chapter 11 is also the appropriate chapter for certain types of individuals whose debts exceed the limits permissible under Chapter 13. In general, Chapter 11 reorganizations tend to be more complicated, because the debtor must actually perform the role otherwise performed by a trustee. Through the chapter 11 process, a debtor will presents a plan to the various creditors and seek to obtain those parties consent and the court’s approval. If approved, a plan provides for a specified payments to creditors (often only a partial payment), while simultaneously allowing the debtor to reorganize financial and business affairs. Among other requirements, any plan proposed must always provide payments to creditors which present a superior result than simply liquidating the debtor’s assets. This requirement, coincidentally, is also one of the primary tools in gaining the creditors’ cooperation – it’s in their best interest. To learn more about chapter 11, check out our blogs on this topic. Have a specific problem and need advice, try here.
Are You Presently Evaluating The Difference Between Chapter 7 and 13?
If you are considering bankruptcy, we urge you to understand (from a strategic perspective), the difference between chapter 7 and 13. And when evaluating your options, we strongly advise that you consult a qualified bankruptcy attorney.