Bankruptcy comes in two flavors: Chapter 7 (liquidation) and Chapter 13 (repayment). For creditors and claim buyers, they represent fundamentally different recovery scenarios. Chapter 7 offers quick closure with minimal payouts. Chapter 13 offers slower payouts but significantly better recovery rates. Understanding the difference is critical before buying or valuing a claim.
Chapter 7: Liquidation (Quick, Cheap)
How It Works
Debtor's non-exempt assets are sold. Proceeds are distributed to creditors in priority order. Process closes in 3-6 months. Creditor recovery: fast payout, small amount.
Creditor Recovery in Chapter 7
- Secured creditors: Paid first from asset sales (mortgages, auto loans). Often recover 80-100% of their claim.
- Priority unsecured: Paid second (taxes, child support, wages). Recover 30-60% typically.
- General unsecured: Paid last (credit cards, medical debt, trade credit). Recover 3-15% on average. Sometimes nothing if assets run dry.
Example: $100,000 in total claims. $50,000 in liquidated assets. Secured claims ($30,000) paid in full. Priority ($15,000) recovers $10,000. General unsecured ($55,000) recovers $10,000 total (18 cents on dollar).
Timeline: Fast Closure
Meeting of creditors: 20-40 days after filing. Trustee begins asset liquidation: 60-90 days. Final distributions: 120-180 days. Done.
Claim Buyer Perspective
Chapter 7 claims are purchased at 5-10 cents on the dollar. Payouts are lump-sum and final. Most claim buyers avoid Chapter 7 due to low recovery rates.
Chapter 13: Reorganization (Slow, Better Recovery)
How It Works
Debtor proposes a 3-5 year repayment plan. Payments go to a trustee who distributes to creditors. Debtor keeps assets. Process takes 36-60 months. Creditor recovery: gradual, significantly higher.
Creditor Recovery in Chapter 13
- Secured creditors: Paid through plan (mortgages, auto loans, secured lines). Recover 85-100% of claim value.
- Priority unsecured: Paid in full (taxes, child support, wages). Recover 100%.
- General unsecured: Paid pro-rata from leftover plan funds. Recover 20-60% depending on debtor's disposable income.
Example: Same $100,000 in claims. Debtor proposes 60-month plan paying $2,000/month ($120,000 total). Secured ($30,000) paid in full. Priority ($15,000) paid in full. General unsecured ($55,000) receives pro-rata share of remaining funds (likely $30,000+, or 55 cents per dollar).
Timeline: Slow, Reliable
Plan confirmation: 120-180 days. Plan payments: 36-60 months. Final distributions at plan completion. Typical total timeline: 4-6 years.
Claim Buyer Perspective
Chapter 13 claims are purchased at 15-25 cents on the dollar. Payouts are steady and predictable over plan period. Better investments than Chapter 7 despite longer timeline.
Comparison Table: Chapter 7 vs Chapter 13
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Recovery for General Unsecured | 3-15% (median 8%) | 20-60% (median 40%) |
| Timeline to Resolution | 3-6 months | 36-60 months |
| Payout Method | Lump-sum, one time | Monthly over 3-5 years |
| Debtor Keeps Assets? | No (liquidated) | Yes (protected) |
| Claim Buyer Purchase Price | 5-10 cents/$ | 15-25 cents/$ |
| Claim Buyer ROI | 30-100% annualized (6 months) | 40-150% annualized (5 years) |
| Predictability | Uncertain (asset-dependent) | High (plan-confirmed) |
Claim Priority: Why It Matters
Your recovery depends entirely on where your claim falls in priority order.
Priority Hierarchy
- Secured claims: Mortgages, auto loans, equipment financing backed by collateral.
- Priority unsecured claims: Taxes, child support, employee wages, certain creditor claims.
- General unsecured claims: Credit cards, medical debt, personal loans, vendor invoices.
If you hold a general unsecured claim (most common), you're paid last in Chapter 7 (and thus recover least) and third-tier in Chapter 13 (but still significantly more).
Real Example: 2026 Retailer Bankruptcy
A mid-size retailer files Chapter 13 with $2M in total debts. Assets are protected. Debtor proposes 60-month plan paying $50,000/month.
- Secured creditors (landlords, equipment lenders): $400,000 total. Recover 100%.
- Priority unsecured (taxes, wages): $300,000 total. Recover 100%.
- General unsecured (suppliers, trade credit): $1,300,000 total. Receive pro-rata share: ($3,000,000 plan value - $400K secured - $300K priority) / $1,300K claims = $2,300K / $1,300K = 177% of general claims paid... wait, that's overpayment.
Corrected example: Plan confirms paying $2,000,000 total. Secured $400K, priority $300K, general unsecured receives $1,300K (100% recovery).
Claim buyer purchasing $100,000 of this retailer's claims at 20 cents: $20,000 investment, $100,000 recovery, 400% ROI over 5 years (80% annualized).
Why Claim Buyers Prefer Chapter 13
Three reasons:
- Higher recovery: 20-60% vs 3-15% in Chapter 7. More money back.
- Predictability: Plan is court-confirmed. Payments are reliable. Chapter 7 depends on liquidation success.
- Better ROI math: Buying at 20 cents and getting 40 cents = 100% return. In Chapter 7, buying at 5 cents and getting 8 cents = 60% return (but in 6 months vs 5 years).
Chapter 13 claims are the "boring but profitable" investment. Chapter 7 claims are "quick but disappointing" investments.
How to Identify Chapter Type Before Buying
- Court docket: Chapter 7 cases are titled "Case No. X-XX-XXXXX" with no plan reference. Chapter 13 cases show active plan status.
- PACER search: US Courts PACER database shows filing chapter clearly.
- Case age: Chapter 7 cases under 6 months old are near resolution. Chapter 13 cases show monthly plan payments in docket history.
- Trustee type: Chapter 7 uses asset liquidator. Chapter 13 uses plan trustee (pays creditors monthly).
Before buying any claim, verify the chapter type. The difference in recovery is dramatic.
Bottom line: If given a choice between Chapter 7 and Chapter 13 claims at the same price, always buy Chapter 13. Recovery rates are 3-4x better. If Chapter 7 claims are cheaper (they should be), they only make sense as quick cash plays, not investments.
FAQ
Can a debtor convert from Chapter 7 to Chapter 13?
Yes. Some debtors can convert mid-case if they have enough income. This converts a low-recovery Chapter 7 to a higher-recovery Chapter 13. Creditors benefit from conversion.
Do all Chapter 13 plans pay the same percentage?
No. General unsecured creditors receive pro-rata share of plan funds. If plan has high priority claims, general unsecured receives less. Ranges from 5-100% depending on debtor's disposable income and other debts.
Can you appeal a Chapter 13 plan?
Yes. Creditors can object to plan confirmation if they believe the plan is unfeasible or unfair. However, objections rarely succeed if the plan is within bankruptcy code guidelines.