What is the Difference between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy?

Chapter 7 currently is designed to permit a person filing for bankruptcy (a debtor) to wipe out (discharge) many types of debt without further payments on unsecured debts. Chapter 13 requires debtors to make payments over the course of at least 36 months. A debtor files a petition to begin either process. Upon filing the petition an immediate order is put in place that prohibits creditors from taking any action to collect a debt (automatic stay) without getting prior permission of the bankruptcy court. The petition must list all creditors, all assets, and include a complete and accurate monthly budget and answer many standard questions set forth in the statement of financial affairs that is included in every petition.

Most Texas debtors are able to keep all or the vast majority of their assets under Chapter 7. They choose with assistance of their attorney whether to use the Texas or Federal exemptions. There are advantages and disadvantages to each set of exemptions. If a debtor does not own a home or has only limited equity in the home the Federal exemptions may allow a debtor to protect assets of up to about $8500.00 that are not “exempt” under the Texas “exemptions”. Among the assets that are not normally exempt are stocks, bonds, boats, non-homestead land, and “extra” vehicles.

There are many reasons a debtor might choose to file Chapter 13 rather than Chapter 7. A debtor might choose Chapter 13 if:

  • The debtor wants to make an attempt to repay debts but cannot afford to pay all of the debts
  • The debtor’s disposable income is too large to qualify for Chapter 7
  • The debtor wishes to protect property which is subject to secured loan which is not current
  • The debtor has debts which are not dischargeable under Chapter 7

Chapter 13 is designed to assist debtors protect assets and repay their creditors through a repayment plan over a period of 36 to 60 months. ALL of a debtor’s disposable income is required to be paid to the Chapter 13 Trustee for at least 36 months.

Through proper use of Chapter 13, a debtor may force a creditor to accept repayment of delinquent payments on secured debts in order to keep assets such as a home or car. The debtor can also force the IRS to accept payments through the plan instead of on the IRS’s schedule. The plan may even provide in certain cases a discharge of taxes or interest. Chapter 13 can also permit a debtor to keep all of his or her assets so long as the payments through the plan exceed the value of non-exempt assets. This is only a brief explanation and is not meant to cover all of the possible exceptions and full complexity of the law.