Comparing Chapter 13 and Chapter 7 Bankruptcy

An increasing number of people are filing for bankruptcy.  It is therefore important that California CPAs be well-informed about it.

That is why CalCPA's San Diego Chapter's Management of an Accounting Practice Committee meeting for September 2007 was dedicated to helping CPAs answer any questions their clients might have about bankruptcy. The table below is part of a presentation, titled What You Need to Know when Your Client Asks about Bankruptcy, that  was delivered by Thomas B. Gorrill, Esq.

What happens if

Chapter 13

Chapter 7

You're behind on your mortgage or car loan. You can repay the arrears through your plan, over 3 or 5 years, and keep the house/car. You'll have to bring the loan current shortly after filing the case or the lender will obtain the court's permission to take possession of the house/car.
You owe back taxes to the IRS. The results depend on your circumstances. The result depends on your circumstances.
You have valuable nonexempt property. You keep all of your property. You must give it up, pay the trustee its fair market value or, if the trustee agrees, swap exempt property of equal value for it.
You have co-debtors on personal (non-business) loans. The creditor may not seek payment from your co-debtor for the duration of your case. The creditors will go after your co-debtor for payment.
Your current monthly income does not exceed the median family income for your state. If you choose to file Chapter 13, you may propose a 36 month repayment plan. You are allowed to file under Chapter 7.
Your current monthly income does exceed the median family income for your state. You must propose a 60 month repayment plan. If further means testing shows you can fund a Chapter 13 plan, the court will dismiss your Chapter 7 case unless you convert it to Chapter 13.
You received a bankruptcy dismissal in the past year. The automatic stay expires after 30 days as to debts/collateral for debts, unless the prior case was a Chapter 7 dismissal for "abuse". The automatic stay expires after 30 days as to debts/collateral for debts.
You received two or more bankruptcy dismissals in the past year. The automatic stay does not take effect, unless the prior case was a Chapter 7 dismissal for "abuse". The automatic stay does not take effect.
You received a previous bankruptcy discharge. You can't receive a new Chapter 13 discharge if your prior Chapter 7 discharge was in a case filed less than 4 years ago or if your prior Chapter 13 discharge was in a case filed less than 2 years ago. You can't receive a new Chapter 7 discharge if your prior Chapter 7 discharge was in a case filed less than 8 yrs ago; or if your prior Chapter 13 discharge was in a case filed less than 6 years ago (unless you repaid at least 70% of your allowed unsecured claims).
You owe debts for past due or future "domestic support obligations," such as alimony or child support. These debts can be included in your Chapter 13 repayment plan, but any unpaid balance cannot be erased. Unpaid domestic support creditors will be allowed to proceed against your exempt property to collect the unpaid debt. During the case, your failure to pay post-petition support will prevent confirmation, will prevent entry of your discharge order, and may result in the dismissal of your case. These debts cannot be erased in a Chapter 7 bankruptcy. Even worse, filing bankruptcy will allow domestic support creditors to proceed against your exempt property to collect the debt.
You owe debts for:
  • student loans
  • court-ordered restitution or criminal fines
  • dues/assessments owed to a homeowner or condominium owner association
  • taxes less than 3 years past due
  • debts for personal injuries arising from your DWI/DUI
These debts can be included in your Chapter 13 repayment plan, but any unpaid balance cannot be erased. These debts cannot be erased in a Chapter 7 bankruptcy.
You have debts incurred just before filing, including debts of $500 or more to a creditor for luxury goods or services purchased within 90 days before filing, or debts for cash advances of $750 or more obtained with 70 days before filing. These debts can be included in your Chapter 13 repayment plan, but cannot be erased if the creditor objects and proves your bad acts to the court. These debts cannot be erased in a Chapter 7 bankruptcy.
You have debts from willful/malicious injury to property or to a person who has not yet been awarded damages or restitution by a court. These debts can be included in your Chapter 13 repayment plan. If you do not pay them in full during your case, any unpaid balance is wiped out at the end of the case. These debts are not dischargeable if the creditor objects and proves your bad acts to the court.
You have debts incurred by fraud theft, breach of trust, embezzlement, or for willful/malicious injury to another person or their property. These debts can be included in your Chapter 13 repayment plan, but cannot be erased if the creditor objects and proves your bad acts to the court. These debts are not dischargeable if the creditor objects and proves your bad acts to the court.