Entitled liquidation, Chapter 7 contemplates an orderly, court supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most Chapter 7 cases, there may not be an actual liquidation of the debtor's assets. These are often called “no-asset cases.” Amendments to the Bankruptcy Code require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7.
Adjustment of Debts of an Individual with Regular Income, or Chapter 13, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a “plan” to repay creditors over time- usually 3 to 5 years. Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disproves the debtor's repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to the creditors, through the trustee, based on the debtor's anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.