Chapter 7 vs. Chapter 13

The Bankruptcy Law Center provides the information on this web page as a courtesy to current and prospective clients. As stated in our Disclaimer this information is not intended to create an attorney/client relationship. Although we hope these pages are helpful, they are not intended as legal advice and should not be considered as such. As with all legal matters, information provided in this format is generalized.

However, all cases are different as all people's personal situations are different. Therefore, you should not assume that all the information will apply in your circumstance. You should always confirm all matters with your attorney.

Overview Of Chapter 7 Bankruptcy

Chapter 7 is the more traditional type of bankruptcy, and is often referred to as a "straight" bankruptcy or a "liquidation". In Chapter 7, a trustee is appointed by the Court to oversee your case. The Chapter 7 Trustee has the responsibility to determine if you have any assets that are not considered exempt under the law, sell such assets, and use to proceeds to distribute among creditors.

The ability to exempt assets in bankruptcy depends on (1) the state you have lived in over the past 2½ years, and (2) how much the assets are worth. During the initial consultation, we will ask you a series of questions from a checklist to determine whether or not you are likely to have any non-exempt assets. However, well over 95% of Chapter 7 cases are called "no-asset" cases, meaning that there are no assets to distribute to creditors.

Approximately 30 days after the filing of a Chapter 7 case, the debtor is required to attend a brief hearing with the Chapter 7 Trustee called the "meeting of creditors" or the "341(a) hearing". At that hearing, which usually does not exceed 5 minutes, the Chapter 7 Trustee will ask a series of questions to find out if any non-exempt assets exist, or if there are any legal issues or problems with the case. The questions are almost identical to the checklist of questions we use during the first consultation in the office. Creditors have the right to attend the hearing and ask questions if they wish. Few, if any, of the creditors actually attend these hearings. Approximately 60-75 days after the hearing, the Court issues a notice through the mail indicating that debts have been discharged.

Most debts are dischargeable in bankruptcy. However, there are several exceptions, the most common of which are:

Most federal and state income taxes. However, if the taxes are more than three years old, and other criteria are met, some taxes can be discharged in bankruptcy. Some taxes that cannot be discharged in Chapter 7 can be dealt with in a Chapter 13 bankruptcy.
Student loans and other educational debts. The Bankruptcy Code provides for a discharge of student loans upon the showing of "undue hardship", but that provision is construed so narrowly such that it is extremely difficult to discharge student loans in bankruptcy.
Debts incurred by fraud (i.e., debts incurred without the intent to repay or debts incurred by use of a false financial statement or other written document).
Debts incurred by wilful and malicious injury, fiduciary misconduct, or embezzlement.
Criminal fines, traffic tickets, and criminal restitution.
Child support and spousal support.
Personal injury or death caused to others while driving under the influence of alcohol or drugs.
Divorce decree judgments

With secured debts (i.e., home loans and vehicle loans), a Chapter 7 debtor normally either continues to pay on the debt (and retains the property) or surrenders the property (and discharges the entire obligation owed to the secured creditor). See Reaffirmation Section- (clickable)

Common questions asked by persons contemplating a bankruptcy filing are listed on
the Oregon Bankruptcy Court's website at http://www.orb.uscourts.gov/faq
or the Washington Bankruptcy Court's website at http://www.wawb.uscourts.gov/posts.htm?f=4.

Overview Of Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is often called a "wage earner plan" debt repayment plan. In this type of bankruptcy, a "Chapter 13 Plan" is filed with the Court. The debtor makes payments to the Chapter 13 Trustee for a 3-5 year period depending on (a) household income and expenses, (b) the nature of the debts owing, and (c) the value of assets owned by the debtor. From the money that is paid to the Chapter 13 Trustee, creditors are repaid by the Trustee as determined by the provisions of the Chapter 13 Plan. Although there are exceptions, most debts that are not paid through the Chapter 13 Plan are discharged at the end of the case. If the case is not successfully completed, the case is dismissed, and creditors are free to resume collection efforts.

Common reasons for a client to file Chapter 13 are:

To protect assets that might be lost in a Chapter 7 case because of too much equity.
To pay non-dischargeable debts (most often taxes and child support) through a Chapter 13 Plan as opposed to what the creditor might demand.
To prevent a foreclosure on a home, or a repossession of a car or other secured property
To "rewrite" auto loans when the value of the vehicle is less than the amount owed.
To obtain a discharge of certain debts that are not dischargeable in Chapter 7.
To consolidate debts and pay as much as possible over the term of the Chapter 13 Plan without interference from creditors.
To obtain debt relief when a Chapter 7 case was filed within the past 8 years.
If your income is in excess of certain limits.

As in a Chapter 7 case, a meeting of creditors is held with the Chapter 13 Trustee approximately 30 days after filing. During that meeting, the Chapter 13 Trustee will ask some basic questions about the person's finances, and ensure that the proposed Chapter 13 Plan complies with legal requirements. As with Chapter 7, this hearing usually lasts about five minutes, and is usually not attended by creditors.

Approximately one month after the creditor's meeting, the Bankruptcy Court will hold a hearing to confirm the Chapter 13 Plan. The debtor rarely needs to attend that hearing. The Plan will be confirmed unless the Chapter 13 Trustee or one of the creditors has some objection to the Plan. If objections are filed, they can usually be resolved through negotiation with the objecting party so that the plan can be confirmed.

While Chapter 13 can be a very powerful tool for the debtor, Chapter 13 relief does come with some drawbacks:

A Chapter 13 debtor is prohibited from incurring debt while the case is active without the approval of the Chapter 13 Trustee.
(In Oregon) Income tax refunds normally must be turned over to the Chapter 13 Trustee during the first three years of the Plan. Earned income credit tax refunds do not have to be turned over to the Trustee.
Payments may increase if income increases while the case is active. The Chapter 13 Trustee monitors income by requiring that copies of tax returns be provided each year.
Fluctuation in income can make it difficult for a debtor to complete a Chapter 13 case.

Once all of the payments are made pursuant to the terms of the Chapter 13 Plan, any remaining debts owing as of that time (with the exception of child support, criminal fines and restitution, some taxes and student loans) are normally discharged.