When your debtor files for bankruptcy, the first question is: which chapter? The chapter they filed under determines how long the case will take, what tools you have as a creditor, and what you can realistically expect to recover.
The two chapters differ in ways that matter to you.
Chapter 7: The Liquidation
Chapter 7 is a liquidation bankruptcy. The debtor is asking for a fresh start. A court-appointed trustee collects whatever non-exempt assets the debtor has, sells them, and distributes the proceeds to creditors. The debtor then receives a discharge, which wipes out their personal liability on most debts.
For most individual Chapter 7 filers, there are few or no non-exempt assets, so unsecured creditors receive nothing. The case is typically over in three to six months.
What this means for a secured creditor: your lien on real property survives the Chapter 7 discharge even though the personal obligation is wiped out. If the debtor keeps the property, they either reaffirm the debt (agreeing to remain personally liable) or keep making payments informally. If they stop paying after the bankruptcy, you can foreclose the lien. You just cannot sue them personally for a deficiency, because that right is gone unless there was a valid reaffirmation agreement.
Chapter 13: The Reorganization
Chapter 13 is a reorganization. The debtor proposes a plan to repay some or all of their debts over three to five years from future income. The automatic stay remains in effect for the entire life of the plan, which means your foreclosure stays on hold while the plan is in progress.
For a secured creditor with a lien on the debtor’s home, Chapter 13 can be frustrating. The debtor can stop a scheduled foreclosure sale by filing the morning of the sale, and then propose a plan to catch up on the arrears over the next five years while continuing regular mortgage payments. Courts generally allow this for a primary residence.
However, Chapter 13 is not a free ride for debtors. The debtor must actually fund the plan with regular income. They must stay current on ongoing mortgage payments after filing. If they miss payments, whether to us under the plan or on the ongoing mortgage obligation, we can file a motion for relief from the stay and move forward with the foreclosure.
We watch these cases closely. When a Chapter 13 debtor slips up, we move.
The Practical Comparison at a Glance
In a Chapter 7, the case is usually over quickly. You either get stay relief promptly (because there is no reorganization to protect) or you wait a few months for the case to close and proceed with your foreclosure.
In a Chapter 13, the case can last five years. A debtor who stays current on their plan can hold a secured creditor at bay for that entire time, but only if they actually perform. Most Chapter 13 plans fail. When they do, we are ready.
Not Sure Which One Your Debtor Filed?
When a client calls us and says “my borrower filed bankruptcy,” the first thing we do is look up the case. We identify the chapter, review the debtor’s schedules, check whether your claim is listed correctly, determine what deadlines apply, and advise you on the right course of action.
Do not wait. Bankruptcy deadlines are real, and missing them can cost you rights that are difficult or impossible to recover.
In this section: Bankrupt Debtors · Automatic Stay Relief · Plan Negotiation · Proof of Claim
Frequently Asked Questions
Which chapter is worse for a secured creditor, 7 or 13?
It depends on the facts. Chapter 7 resolves faster, in three to six months, but the borrower's personal liability is discharged, leaving only the lien. Chapter 13 can drag on for five years, but the stay remains in place only if the debtor performs. Most Chapter 13 plans fail. When they do, we move for stay relief immediately. For a creditor with collateral in good condition and a borrower with real assets, Chapter 7 may be preferable because it ends quickly. For a creditor whose collateral has limited value and whose best recovery is the personal deficiency claim, Chapter 13 may provide more protection for that claim.
Can a Chapter 13 debtor reduce the interest rate on my loan?
Not for a loan secured only by the debtor's primary residence. The Bankruptcy Code specifically prohibits modifying home mortgage terms in a Chapter 13 plan. For loans secured by anything other than the primary residence, yes, a Chapter 13 plan can propose a reduced interest rate on the crammed-down portion of your secured claim. We object to inadequate interest rate proposals as a standard part of our plan review on every Chapter 13 case.
What if the debtor converts from one chapter to another?
Debtors sometimes convert from Chapter 13 to Chapter 7 when they can no longer fund the plan, or from Chapter 7 to Chapter 13 when they want to try to save a home. Conversion changes the applicable rules and sometimes affects pending stay relief motions or plan-related objections. We monitor for conversions and advise clients when a conversion changes the appropriate strategy.
How do I know which chapter my debtor filed?
The bankruptcy notice the court sends to creditors will identify the chapter. You can also look up any active bankruptcy case in the federal PACER system using the debtor's name. When a client calls us about a bankruptcy, the first thing we do is pull up the case and identify the chapter, case number, and key deadlines.