Key Differences Between Chapter 7 and Chapter 13

One question that is asked, at nearly every single 341 Meeting of Creditors, is whether the debtor has reviewed the bankruptcy information sheet. This document, included in the bankruptcy petition, in large part explains some of the differences between the various chapters of the bankruptcy code. It briefly mentions what a Chapter 11 is (large-scale reorganization) and a Chapter 12 (bankruptcy for farmers and fishermen), but focuses mainly on the differences between a Chapter 7 and Chapter 13. It is important for any debtor to know the key differences between both of these.

A Chapter 7 bankruptcy is a liquidation of your assets. This is the primary chapter within which consumer debtors seek bankruptcy protection. A Chapter 7 can also be thought of as an income analysis, as determining household income and whether it is above or below the appropriate state income median level for the size of that family is part of determining qualification for a Chapter 7. This chapter also represents an asset driven bankruptcy, meaning that part of the economic analysis is to determine how much, if any, unexempt property is part of the bankruptcy estate. If the trustee indicates that there are no assets for liquidation, the debtor will receive a discharge of all the unsecured debt in the case.

A Chapter 13 bankruptcy, on the other hand, is not a liquidation. The analysis is instead centered on just how much of the debt can be repaid per month, and whether it will be a 36 or 60 month plan. Like a Chapter 7, a lot of the focus is on income. But with the 13, the income analysis goes further to see how much disposable income is left over to make a trustee payment each month. This in large part helps determine how much, from 10-100%, of the unsecured debt will be repaid.

A Chapter 13 is also used to consolidate debts, or help a debtor catch up on a home or car to prevent the loss of said property. Using the Chapter 13 to save property shows the dichotomy between the two chapters in that part of the Chapter 7's analysis is to determine how not to lose property, whereas the Chapter 13 can be used to directly save property.

Finally, the Chapter 13 is a much longer process. The Chapter 7 can be over in as little as 90 days, whereas the minimum Chapter 13 is 36 months. The 13 process involves submitting a Chapter 13 plan for approval by the court, attending a 341 Meeting of creditors, and subsequently attending a confirmation hearing (which is usually done by the attorney only). Both Chapters are incredibly useful depending on the circumstances, so speaking with a Chicago bankruptcy lawyer before proceeding with either is highly recommended.