Chapter 7 vs Chapter 13 on a Seller Carry

If a seller-carry borrower files for bankruptcy relief, the chapter chosen determines how arrearage is handled, when the personal obligation discharges, and what workflow the holder must maintain. Chapter 7 discharges personal liability quickly and leaves the holder’s lien intact in rem; Chapter 13 runs a cure-and-maintain plan across three to five years.

How Chapter 7 treats the carry

Chapter 7 liquidates the borrower’s non-exempt assets under §704 and discharges the personal liability on the carry under §727. The lien against the property survives the discharge under §506 and §524(a) — the holder retains the in rem position regardless of the discharge. The borrower then elects between surrendering the property (§521(a)(2) statement of intention), retaining the property with continued payments, or reaffirming the debt under §524(c) with court approval where the property is the principal residence.

How Chapter 13 treats the carry

Chapter 13 runs a three- to five-year reorganization plan under §1322. The borrower proposes a plan that cures the pre-petition arrearage across the plan term while maintaining the post-petition contract installment. The §1322(b)(2) anti-modification rule protects a principal-residence lien from any modification of the underlying note terms — rate, term, and principal balance are locked. The §1325(a)(5) confirmation rule requires the plan to preserve the holder’s secured position throughout the case.

How discharge runs in each chapter

Chapter 7 discharges the personal obligation within months of filing following the §341 meeting and discharge order. Chapter 13 discharges only after plan completion across the full three- to five-year term. In either chapter, the discharge bars personal collection under §524 but leaves the lien intact against the property in rem — the holder’s security survives regardless of which chapter is filed.

The §1322(b)(2) anti-modification rule

The §1322(b)(2) rule bars modification of the rights of a holder whose claim is secured only by a security interest in the debtor’s principal residence. On an owner-occupied seller carry, the plan cannot strip the lien, reduce the principal, change the rate, or alter the term — the plan cures the arrearage and maintains the contract terms intact. On an investor-purpose seller carry against non-residential collateral, §1322(b)(2) does not apply, and the §506(a) cramdown becomes available to the borrower.

Post-petition payment flow in each chapter

In Chapter 7, post-petition payments run at the borrower’s election — surrender stops payments entirely, retention requires continued payments directly to the holder, and reaffirmation restores full personal obligation on the same payment structure. In Chapter 13, the post-petition contract installment runs directly to the holder while the pre-petition arrearage runs through the trustee as part of the plan distribution.

How the §362 automatic stay terminates

The §362 stay terminates on the discharge order or case dismissal in Chapter 7, on plan completion or dismissal in Chapter 13, or earlier on a §362(d) motion for relief granted by the court. Relief under §362(d) runs on (1) cause — including lack of adequate protection — or (2) no equity in the property combined with the property not being necessary to an effective reorganization. Filing the §362(d) motion promptly when payments stop is a core servicing decision in either chapter.

Holder workflow comparison

Chapter 7 runs a compressed workflow concentrated in the early months of the case: the §342 notice, the proof of claim, the §521(a)(2) intention review, the reaffirmation analysis where applicable, the discharge order, and the transition to an in rem-only posture. Chapter 13 runs a sustained workflow across the full plan term: the §342 notice, the proof of claim with Form 410A, the plan objection review, the FRBP 3002.1 notice schedule, trustee disbursement reconciliation, and the cure-completion review at plan end.

Expert Take

Chapter 13 is not always the better outcome for a holder. The cure-and-maintain plan preserves cash flow and keeps the borrower in the property — but it obligates the holder to three to five years of active case monitoring, FRBP 3002.1 compliance, and trustee reconciliation. A holder who fails to run that workflow correctly risks losing the right to recover post-petition fees and costs, or being held in contempt for improper payment application. The in rem lien survives both chapters; what the holder can do with it depends on how carefully the case is managed from the §342 notice forward.

Which chapter is more common by collateral type

Chapter 13 is more common on owner-occupied seller carries because the cure-and-maintain mechanism gives the borrower a path to preserve the home through reorganization. Chapter 7 is more common where the borrower has no equity and elects surrender, or where the carry is on investor-purpose collateral with no home-preservation objective. The borrower’s income level and the means test under §707(b) also shape the outcome — a borrower above median income who fails the means test is channeled into Chapter 13 regardless of preference.

Frequently Asked Questions

Which chapter is more common on seller-carry filings?

Chapter 13 is more common on owner-occupied seller carries because the cure-and-maintain mechanism preserves the borrower’s home through the reorganization. Chapter 7 is more common where the borrower has no equity and elects to surrender the property, or where the carry is on investor-purpose collateral with no home-preservation goal.

Does the chapter choice affect the lien’s survival?

No. Both chapters preserve the lien against the property under §506 and §524(a) — the lien runs through discharge in rem. The chapter affects the personal-obligation discharge timing and the cure-and-maintain mechanics, not lien survival itself.

Can the borrower convert between chapters?

Yes, subject to court approval and the conversion rules under §706 (Chapter 7 to other) and §1307 (Chapter 13 to other). A Chapter 13 case that runs into plan-payment difficulty converts to Chapter 7 in many filings; a Chapter 7 case rarely converts to Chapter 13 absent specific eligibility considerations.

What happens if the Chapter 13 plan fails before completion?

If the borrower cannot complete the plan, the case may be dismissed or converted to Chapter 7 under §1307. Dismissal lifts the §362 stay and returns the holder to state-court remedies — including foreclosure — with the pre-petition arrearage in default. Conversion to Chapter 7 runs the Chapter 7 discharge and the surrender-or-reaffirm election on the carry.

This article is educational and does not constitute legal advice. A bankruptcy filing on a seller-carry borrower involves federal bankruptcy statutes under Title 11, federal procedural rules, local court rules, and state-law foreclosure provisions that vary by jurisdiction. Consult qualified legal counsel on the bankruptcy requirements that apply to any specific seller-carry matter.

Sources

• 11 U.S.C. §362 — Automatic stay. Cornell Legal Information Institute.
• 11 U.S.C. §506 — Determination of secured status. Cornell Legal Information Institute.
• 11 U.S.C. §524 — Effect of discharge. Cornell Legal Information Institute.
• 11 U.S.C. §706 — Conversion of a case under this chapter. Cornell Legal Information Institute.
• 11 U.S.C. §707(b) — Means test. Cornell Legal Information Institute.
• 11 U.S.C. §1307 — Conversion or dismissal. Cornell Legal Information Institute.
• 11 U.S.C. §1322 — Contents of plan. Cornell Legal Information Institute.
• 11 U.S.C. §1325 — Confirmation of plan. Cornell Legal Information Institute.
• Federal Rule of Bankruptcy Procedure 3002.1 — Notice relating to claims secured by security interest in the debtor’s principal residence. Cornell Legal Information Institute.

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• 10 Private Mortgage Servicing Pitfalls and Solutions
• 1098 and 1099 Filing for Seller Carry Holders