How is Chapter 13 Bankruptcy different than Chapter 7?

Most people know that there are two main types of bankruptcy for your average person: Chapter 7 and Chapter 13. Do you know the differences?

Chapter 13 Bankruptcy is considered a “reorganization.” This is different than Chapter 7 which is considered a “liquidation.” In a Chapter 13, the goal is to allow the debtor some time (typically 3-5 years) to reorganize his or her finances under the protection of the Bankruptcy Court.

What that means is that the debtor will be repaying at least a portion of their unsecured debts, along with all of their secured and priority debts, over the course of the bankruptcy case.

A typical Chapter 13 Bankruptcy will last anywhere from 3-5 years. Sometimes it can be shorter than 3 years. In almost all cases, the debtor will be making a monthly payment each and every month to repay some of his or her debts.

The monthly Chapter 13 “plan” payments will be made to the Bankruptcy Trustee. Here in the Eastern District of California, the bankruptcy trustees require that the debtor pay each month with certified funds. This can be a cashier’s check or money order. Some trustees are moving to electronic payments as well.

The Bankruptcy Trustee distributes the monthly payment according to the terms of the Chapter 13 Plan. The “plan” is a document filed by the debtor’s attorney. The plan specifies how each class of creditors is to be treated during the case.

The Chapter 13 plan must be confirmed by the Bankruptcy Court. This means that the Court must hold a hearing before it is approved. If any creditors come to court to object, the Court can order the debtor to file an amended plan to address any deficiencies.

A debtor considering filing Chapter 13 must prove to the Court that he or she has sufficient monthly income to afford the proposed Chapter 13 plan payment. If the debtor doesn’t have enough income to pay each month, the Chapter 13 will fail.

Chapter 13 bankruptcies are much more complex than Chapter 7. They also last much longer than a Chapter 7. I will be blogging more in the future about the specific reasons why a person might decide to file Chapter 13.

Please do not hesitate to contact my office if you have any questions about Chapter 13 or Chapter 7 bankruptcy. I can be reached at (916) 333-2222.

Attorney Rick Morin