Chapter 7 Proceedings
A Chapter 7 proceeding is designed to provide debt relief for individuals who are financially unable to pay their existing debts from future income. For those individuals who qualify, a Chapter 7 case can be a relatively quick and easy way to obtain a discharge of many debts. However, certain debts, such as most tax obligations, student loans, and domestic support obligations, are not dischargeable.
Individuals who have primarily "consumer debts" are subject to a "means test," which is designed to determine whether the individual has the means to pay a significant portion of their debts from future net income. If so, then creditors may seek to have the Chapter 7 case dismissed or converted to a case under Chapter 13. It is for the bankruptcy court to decide whether or not the case should be dismissed or converted.
The bankruptcy trustee who is appointed in every Chapter 7 case will investigate the debtor's financial affairs and will take possession of and sell any "non-exempt" property (if any) that the debtor owns. The trustee will sell this property and will distribute the net sale proceeds to creditors according to payment priorities stated in the bankruptcy laws.
Chapter 13 Proceedings
A Chapter 13 proceeding is designed for individuals with regular income who have the ability to pay all or part of their existing debts from future income. In a Chapter 13 proceeding, the debtor files a debt adjustment plan which provides for either a three or five year repayment plan for mortgage arrears, vehicle payments and IRS debt, if any. The plan will also provide for some payment to unsecured creditors. The monthly payment amount and term of the plan are determined by income and living expenses, and by the amount of debt paid through the plan.
After completing the plan payments, debts are generally discharged, except for domestic support obligations, most student loans, and most taxes. Also, secured debts, like car loans and home mortgages, are not discharged. These debts must be paid if this property is to be retained. The bankruptcy court must approve the plan before it can take effect. There is also a "standing trustee" who will review the case filing and the plan to make sure the debtor is paying to creditors what is legally required.
