When Chapter 13 Bankruptcy Is Better Than Chapter 7 Bankruptcy

Find out if Chapter 13 bankruptcy is a better option for you than Chapter 7 bankruptcy.

By , Attorney

Chapter 13 bankruptcy gives filers more problem-solving options than Chapter 7 bankruptcy, a quick, no-frills chapter that does little more than erase or "discharge" debt. For instance, you'll likely find Chapter 13 bankruptcy is the better choice over Chapter 7 if you want to:

  • Save a home from foreclosure or a car from repossession by catching up on your payments over time.
  • Force a creditor into a payment plan so you have time to pay off a debt you can't erase in bankruptcy.
  • Keep property you'd lose in Chapter 7 bankruptcy.
  • Protect a codebtor from creditor collections.
  • Reduce the amount you'd pay for your residential or vacation home, car, or other secured property.

Before reviewing when it's best to file for Chapter 13 bankruptcy, you'll want to be sure to understand the differences between Chapters 7, 11, and 13. If you don't quite remember, skip to the bottom for a quick refresher.

When Chapter 13 Might Be Better Than Chapter 7

Before exploring options afforded by Chapter 13, check whether you meet these criteria:

  • You're an individual or a sole proprietor. Partnerships, LLCs, and corporations can't file for Chapter 13.
  • You meet debt requirements. In Chapter 13, your debt can't exceed certain limits. If it does, you'll use Chapter 11 bankruptcy. You can view the current Chapter 13 debt limits here.

If these factors don't preclude you from filing, you might be able to take advantage of these exclusive Chapter 13 benefits.

You Can Catch Up on a Mortgage or Car Loan Using Chapter 13 Bankruptcy, But Not Chapter 7.

If you fall behind on a house or car payment, you risk losing it if you file for Chapter 7. Why? Because these debts are "secured," you must give the property back to the lender if you don't pay as agreed, and Chapter 7 doesn't have a mechanism to help you bring the loan current.

However, in Chapter 13 bankruptcy, you can make up the missed payments over time and keep the home, car, or other property securing the debt. Learn more about making up mortgage arrears and car loan arrears in Chapter 13 bankruptcy.

You Can Force a Creditor Into a Payment Plan With Chapter 13 Bankruptcy, But Not Chapter 7.

Some debts are "nondischargeable" and don't qualify for a discharge in bankruptcy, such as newer income tax balances and domestic support arrearages, and the past-due amounts for these types of debt can be hefty.

If you filed for Chapter 7, your creditor could immediately collect the entire balance owed when the bankruptcy case closed by garnishing your wages, levying on your bank account, or even seizing property.

Instead, you can use the Chapter 13 plan to pay these debts off over three to five years without the threat of harsh collection actions hanging over your head. Learn more about debts in Chapter 13 bankruptcy.

You Can Protect a Codebtor on a Personal Debt by Filing for Chapter 13 Bankruptcy, But Not Chapter 7.

If someone with good credit helped you buy a car or get an apartment by signing your auto loan or apartment lease contract as a responsible party, that person is a codebtor on that debt. They're responsible for paying it if you don't.

Chapter 7 will discharge your obligation to pay only, not your codebtor's responsibility. If you were to file for Chapter 7 bankruptcy, your codebtor would still be on the hook, and the creditor would likely pursue the codebtor for payment.

By contrast, if you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone as long as you keep up with your bankruptcy plan payments and pay off the debt in full. Learn more about what happens to codebtors in bankruptcy.

You Can Keep Property in Chapter 13 That You'd Lose in Chapter 7.

When you file for Chapter 7 bankruptcy, you get to keep property that is protected or "exempt" from creditors under state or federal law. The bankruptcy trustee appointed to your case will sell any "nonexempt" property that isn't protected by a bankruptcy exemption and use the proceeds to pay creditors.

In Chapter 13 bankruptcy, you don't have to give up any property. However, there's a catch. You must pay its value through the repayment plan. So, if you have nonexempt property you can't bear to part with and can afford to pay to keep it, Chapter 13 bankruptcy might be the better choice.

You Can Pay Less on Cars and Other Property Over Time Using Chapter 13 bankruptcy, but Not Chapter 7.

Sometimes, you can use a Chapter 13 "cramdown" to reduce the amount you owe on income-producing real estate, cars, and other financed property that the lender could take back if you don't pay. A cramdown reduces the amount you owe to the collateral's actual value, so it works great when you owe more than the property is worth.

But here are the catches. A cramdown doesn't apply to the home you live in, and you must pay the entire reduced balance through the repayment plan. So if you'd like to cramdown the mortgage on your vacation home in the Poconos, expect a hefty monthly plan payment.

You Can Strip Off a Junior Home Mortgage in Chapter 13, but Not Chapter 7.

Chapter 13 offers a powerful benefit if your residential home is worth less than you owe. Chapter 13's "lien stripping" mechanism lets you remove a "wholly unsecured lien" from your home. A wholly unsecured lien would be a junior loan that wouldn't receive a penny were you to sell your house.

For instance, suppose you owe $500,000 on your first mortgage and $70,000 on a second junior mortgage, but your house is worth only $460,000. If you sold the house, the sales proceeds wouldn't fully pay the first mortgage, so there'd be nothing remaining to pay toward the second. The second would qualify as a wholly unsecured junior mortgage, and you could eliminate the lien, and essentially the loan, using Chapter 13's lien stripping procedure.

Filing for Chapter 13 When You Can't Meet Chapter 7 Bankruptcy Requirements

Some debtors make too much to qualify for Chapter 7 bankruptcy, and Chapter 13 is the only bankruptcy option available. If you don't already know if you qualify, take the Chapter 7 bankruptcy means test.

However, making too much to qualify for Chapter 7 doesn't automatically qualify someone for Chapter 13. You'll need to take an additional step and determine whether you have sufficient income to repay everything required in a Chapter 13 repayment plan.

It's not unusual to find you don't earn enough to propose a Chapter 13 plan the bankruptcy court will approve or "confirm." A local bankruptcy attorney can review your finances and explain your options.

Understanding the Differences Between Bankruptcy Chapters 7 vs. 13 vs. 11

Most people prefer filing for Chapter 7 bankruptcy when possible. Chapter 7 erases or "discharges" qualifying debt quickly and without a repayment plan. Chapters 13 and 11 are "reorganization" bankruptcies that help filers lower monthly bills by paying what they owe over an extended repayment plan, often at a discount.

Chapter 7 has income limits, and filers lose property they don't need to maintain a home and employment. So it's used primarily by lower-income filers who don't own much property (including service-oriented sole proprietors) and closed businesses.

Chapter 13 and Chapter 11 don't require filers to give up property, but the benefit comes at a cost. Individual filers must pay to keep property they'd lose in Chapter 7. Higher-income filers and income-generating companies that can afford to repay some amount to creditors use these chapters.

Learn how Chapter 7 and Chapter 11 bankruptcy can help a small business owner unwind a closed company or help a struggling business thrive.

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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