Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7

Chapter 7 bankruptcy generally provides for complete liquidation of the debtor’s non-exempt assets.

This involves the bankruptcy trustee selling all of the debtor’s assets, subject to certain statutory exemptions, and paying the creditors with the liquidation proceeds. In most cases the trustee will not open up an asset case unless the non-exempt amounts total $1,000 or more. It is at the trustee’s discretion, however.

Chapter 7 does not provide for a repayment plan and is a fairly drastic measure. Businesses may also file under Chapter 11 while individual debtors may file under Chapter 13 to seek an adjustment of the debts owed. In some cases an individual may file for Chapter 11 though it is quite expensive.

If an individual’s current monthly income is more than the Colorado state median income then the bankruptcy code requires the debtor to meet a “means test” to ensure the Chapter 7 filing is not presumptively abusive.

Abuse is presumed if the individual’s aggregate current monthly income (reduced by specific amounts under the Bankruptcy Code) and multiplied by 60 is not less than the lesser of

(i) $12,850, or

(ii) 25% of the debtor’s nonpriority unsecured claims, or $7,700, whichever is greater.

An individual may overcome this presumption if they show special circumstances that justify additional expenses or adjustments to their monthly income. Unless the individual overcomes this presumption, the case will typically be converted to a Chapter 13 bankruptcy or dismissed.

Individuals should also be aware that there are out-of-court agreements with creditors or debt counseling that may be an alternative to filing under Chapter 7. While it is true that most debts are discharged under Chapter 7 and creditors may not pursue collection action against the debtor (individual), there are many exceptions to this general rule, and competent counsel should be sought navigate the intricacies of Chapter 7 bankruptcy.

Chapter 13

Chapter 13 (“wage earner’s plan”) is another part of the bankruptcy code that allows individuals to halt collection actions and present a repayment plan to debtors that takes place over three to five years.

If a debtor’s current monthly income is less than the Colorado state median income then the plan will generally be for three years, and if the individual’s current monthly income is greater than the state median income, then the repayment plan will be for five years.

As mentioned, during the repayment plan creditors may not pursue individual collections against the debtor and debtor’s also have the opportunity to save their homes (unlike in a complete liquidation under Chapter 7). Homeowners have an opportunity to catch up on late mortgage payments and stop foreclosure proceedings; however the individual must make all mortgage payments on time that come due during the designated bankruptcy repayment period.

Another advantage of Chapter 13 is that a debtor may consolidate other debt (including other secured debt other than a home mortgage) and repay those debts over the bankruptcy period.

The bankruptcy trustee collects a payment from the debtor (the loans are treated as a consolidated loan administered by the bankruptcy trustee) and then the payments are distributed to the various creditor by the trustee. In a Chapter 13 bankruptcy, the debtor does not have interaction with the creditors with these consolidated loan payments.

Conclusion

Navigating the differences between Chapter 7 and Chapter 13 as well as the benefits and burdens of each require the help of an experienced and practiced attorney. As a former trustee for the U.S. Bankruptcy Court, Martin Long is an expert in the industry with decades of experience in Bankruptcy Law in Loveland Colorado. We also serve Aurora, Centennial, Highlands Ranch, Denver, Castle Rock, Littleton, Colorado and the surrounding areas. For help with your particular financial matter, call the Law Office of Long & Long for a free initial consultation at 303-832-2655 or go to www.cobklaw.com.