What’s the Difference Between Chapter 7 and Chapter 13? — ProPublica
The two main bankruptcy options available to people overwhelmed with consumer debt are Chapter 7 or Chapter 13. The options differ greatly in how they work and the relief they provide. Below are the basic attributes of each chapter, along with statistics taken from ProPublica’s analysis of bankruptcy filings from 2008 to 2015 to show which types of debtors choose each chapter and how successful they are in wiping out or to pay off their debts. This guide is part of our bankruptcy series, which takes a critical look at the system and its shortcomings.
Chapter 7 is a form of liquidation, that is, the assets of the debtor are distributed among the creditors. However, 95 percent of the cases involve debtors who have no assets above the legal threshold, which is set by state law, and therefore do not have to give up anything. The median Chapter 7 case lasts three and a half months from filing to landfill. About 96 percent of debtors who file under Chapter 7 receive a discharge of their debts.
When a debt is paid, it is no longer legally due. Unsecured debt (eg credit cards, medical bills, etc.) is generally dischargeable with a few important exceptions such as student loans. Secured debts (eg mortgage, car loan) are treated differently in a chapter 7: As a general rule, a debtor can either give up the secured asset or keep it by continuing payments.
Chapter 13 is a form of repayment plan. The debtor’s obligations are combined into one regular payment (although some outstanding obligations like utility bills can be paid outside of the plan) calibrated against the debtor’s income. A Chapter 13 plan often involves paying off a portion of unsecured debt.
A Chapter 13 plan can last three to five years, but most plans are five-year plans. In cases filed between 2008 and 2010, about 41 percent of debtors who filed under Chapter 13 received a discharge of their debts. Another 10 percent first filed under Chapter 13, but was later converted to Chapter 7 and received a discharge that way.
Why would anyone choose one or the other?
Generally speaking, the main benefit offered by Chapter 7 is near guaranteed debt relief. Chapter 13 mainly offers benefits related to secured debt. For example, Chapter 13 stops foreclosure proceedings so debtors who have fallen behind on their mortgages can catch up over time without risking losing their home.
Additionally, if someone has filed for bankruptcy in the past few years and successfully discharged their debts, they might be forced to choose Chapter 13, as Chapter 7 has stricter rules regarding reclassification. After receiving a Chapter 7 discharge, for example, debtors are barred for eight years from receiving another one, but they would only have to wait four years to file under Chapter 13. There is no no such time limit if the debtor’s previous case has been rejected.
How does the deposit affect someone’s credit score?
Bankruptcy is a negative credit event, but the effect is not the same for everyone.
Initially, Chapter 7 and Chapter 13 have the same effect on a credit score, which decreases over time. The main difference is that the flag of a Chapter 13 bankruptcy is removed from the debtor’s credit history seven years after filing, while a Chapter 7 bankruptcy remains there for 10 years.
Since people who file for bankruptcy have typically fallen behind on a number of debts, the typical bankruptcy filer has a credit score between 525 and 575, which is less than about 80% of the population with a rating of . It’s such a low score that when a person files for bankruptcy, their credit rating tends to increase the following year. Indeed, the negative mark of bankruptcy is offset by the positive effect of debt relief.
How much does a lawyer cost ?
An extensive study of attorney fees estimated the average price of a Chapter 7 in 2009 to be around $ 1,000 and a Chapter 13 to be around $ 2,600. Those averages would likely be at least 25% higher if measured today, however, and fees vary by judicial district. For example, in Memphis, typical Chapter 13 attorney fees are now $ 3,800.
Chapter 7 attorney fees are usually due in full before filing, although there are places (again, this depends on where you live) where attorneys will come up with an installment plan. In a Chapter 13, part of the fee is usually paid up front, with the rest paid through the plan. In some parts of the country, especially in the south, lawyers will start a Chapter 13 case for very little – often $ 0 – paid up front. This can be a problem when debtors choose Chapter 13 simply because they cannot afford Chapter 7. Low-income debtors (with an annual household income of less than about $ 35,000) are at particular risk of loss. failing to complete Chapter 13 plans and having their dossier rejected.
What happens if a person’s case is closed without discharge?
Almost all Chapter 7 cases end in a dump, so this is primarily a concern for Chapter 13 reporters.
Low-income debtors are less likely to be discharged through Chapter 13. Otherwise, black debtors are more likely than white debtors to choose chapter 13, But they are less likely to reach the landfill, as we show in this story.
When Chapter 13 cases are dismissed, bankruptcy protection is removed. Since the payments made by debtors over the course of the plan were generally less than what they were contractually owed, they will likely find themselves further behind on their debts.
How does having a lawyer affect someone’s chances?
Debtors who are represented by lawyers tend to fare much better than those who are not.
Only about 8% of debtors who filed a Chapter 7 claim from 2008 to 2015 did so without the help of a lawyer. About 72 percent of these cases resulted in the discharge of the debt. By comparison, debtors who were represented by lawyers were released 98% of the time.
About 9% of debtors who filed for Chapter 13 from 2008 to 2015 did so without the help of a lawyer. It is very rare that such cases reach the landfill. Only about 4 percent of Chapter 13 prosecution cases filed between 2008 and 2010 ended in acquittals.
How many people choose each chapter? What is the typical financial profile of declarants?
Nationally, about 71% of consumer filings were submitted to Chapter 7 in the years after the Great Recession (2009-2011), but Chapter 7 filings have declined in recent years (2013 -2015), while they represented 66% of deposits. The median Chapter 7 debtor from 2008 to 2015 had an annual income of approximately $ 35,000.
In the South, Chapter 13 is much more popular, in part because of the lower upfront attorney fees. In nine states (Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Texas) at least half of consumer reports fall under Chapter 13. Click here to see a map that shows what percentage of filings are under Chapter 13 in each county nationwide.
This large regional difference reflects a difference in the type of debtors who use Chapter 13. Outside the South, Chapter 13 is heavily used by middle-income homeowners, while in the South, many more low-income debtors (with income similar to Chapter 7 debtors) are filing under Chapter 13, and many don’t even own a home.
What happens to people in financial difficulty who do not file for bankruptcy?
There are many reasons, some good and some bad, not to file for bankruptcy. But we would like your help to answer this question. Have you considered declaring bankruptcy in the past 10 years? Do you know anyone else who has done it – or is doing it right now? Fill out our survey and tell us about your experience. We would like to hear from as many people as possible in the coming months to brief our reports on how the system works – or not. Please share.