Differences under Chapter 7 and Chapter 13 of The Bankruptcy Code

What are the Differences under Chapter 7 and Chapter 13: Secured or Unsecured, payment of judgment, impairment of exemptions? By Jean C. Arnold, Esq.

A. Payment of judgment – unsecured debt. In Bankruptcy, it is unlikely the debtor will pay the full amount of the judgment unless the underlying debt is found to be non-dischargeable under 11 U.S.C. §523 or the judgment is part of a Chapter 13 plan to pay the judgment in full or the judgment is reaffirmed by agreement with Court approval.

Under Chapters 7 and 13, if there are non-exempt assets available for distribution, the creditor must timely file a proof of claim under 11 U.S.C. §501. The creditor’s deadline to file the proof of claim is shown on the notice of bankruptcy, and in Chapter 7 or Chapter 13 cases, must be filed within 90 days after the first date set for the meeting of creditors under 11 U.S.C. § 341(a ). See Bankruptcy Rule 3002(c). The bar date for Chapter 7 and Chapter 13 proofs of claim cannot be extended for excusable neglect. In re Smartt Construction Co., 138 B.R. 269 (D.Colo.1992) and Jones v. Arross, 9 F.3d 79 (10th Cir.1993). If the claim is allowed, the creditor will receive the pro rata distribution of assets, following payment of administrative expenses and the Trustee’s fee.

B. Payment of judgment – secured debt. Under both Chapters 7 and 13, the creditor is entitled to maintain its security interest in the debtor’s property. The creditor may seek relief from the automatic stay under 11 U.S.C. §362 and proceed to dispose of the secured asset to satisfy its debt. If the value is insufficient, then the creditor can seek recovery for the unsecured – undersecured – debt component through the claims process under §501.

There are circumstances under 11 U.S.C. §363(c) allowing the Trustee and debtor to use, sell, or lease secured property. Such as the use of “cash collateral” in the ordinary course of the debtor’s business under §§ 721 or 1304. Then, unless the creditor consents, the debtor must comply with the requirements of 11 U.S.C. §363 by providing “adequate protection” to the creditor under §363(e). Adequate protection generally takes the form of providing the creditor with alternative property to secure the debt.

C. Impairment of exemptions. Colorado’s listing of exempt property appears in §13-54-102, C.R.S. However, §13-54-107, C.R.S. expressly prohibits the Bankruptcy exemptions contained in 11 U.S.C. § 522(d). Thus, because Colorado’s state exemptions are not inconsistent with Federal Law, Colorado residents can only use the state exemptions when filing bankruptcy in Colorado. In re Parrish, 19 B.R. 331 (D. Colo. 1982).