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.

Many debtors assume that Chapter 7 bankruptcy is better than Chapter 13 bankruptcy because Chapter 13 bankruptcy requires debtors to repay some debt, whereas Chapter 7 bankruptcy wipes out qualifying debt without a repayment plan. But it isn’t that simple.

Each bankruptcy chapter has unique tools that help solve distinct problems. For instance, a debtor who’d like to save a home from foreclosure will likely be better off filing for Chapter 13 bankruptcy because Chapter 7 bankruptcy doesn’t have a mechanism that will allow you to keep property when you’ve fallen behind on your payment. However, sometimes Chapter 13 bankruptcy is the only option because a debtor isn’t eligible for Chapter 7 bankruptcy.

Here are some good reasons to file for Chapter 13 bankruptcy.

You Aren’t Eligible for Chapter 7 Bankruptcy

Some debtors cannot file for Chapter 7 bankruptcy—leaving Chapter 13 bankruptcy as the only option. You cannot file for Chapter 7 bankruptcy if both of the following are true:

  • Your current monthly income over the six months before your filing date is more than the median income for a household of your size in your state.
  • Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13 bankruptcy, exceeds certain limits set by law. These calculations are referred to as the "means test." They determine whether you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan. If you do, you flunk the test and are ineligible for Chapter 7 bankruptcy.

The means test can get fairly complex, and, to make matters worse, uses unique definitions of "disposable income," "current monthly income," "expenses," and other important terms, which sometimes operate to make your income seem higher, and your living expenses lower, than they are.

For more information, including links to the median income in your state, see The Bankruptcy Means Test. You can also find step-by-step instructions to determine if you qualify for Chapter 7 bankruptcy in How to File for Chapter 7 Bankruptcy, by Attorney Cara O’Neill and Albin Renauer, J.D.

When Chapter 13 Might Be Better Than Chapter 7

Even if you are eligible for Chapter 7 bankruptcy, there are some situations when filing for Chapter 13 bankruptcy might be more advantageous than filing for Chapter 7 bankruptcy.

You are behind on your mortgage or car loan. In a Chapter 13 bankruptcy, you can make up the missed payments over time and keep a home or car. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy. (Learn more about making up mortgage arrears and car loan arrears in Chapter 13 bankruptcy.)

You have a tax obligation, domestic support arrearages, or other debt that you cannot discharge. You can use the Chapter 13 plan to pay these debts in full over three to five years. (To learn more, see Your Debts in Chapter 13 Bankruptcy.)

You need more time to repay your debts. When you have creditors coming after your wages and property, it can be tough to keep a roof over your head while paying your debt. With the protection of the bankruptcy court, you’ll have a better chance of doing both. The automatic stay (more below) stops creditor actions while you repay debt over the course of a three- to five-year repayment plan.

How the Automatic Stay Works

The automatic stay is an order that’s put in place as soon as you file for bankruptcy. All collection efforts to collect money you owe (other than child support and alimony), including calls, letters, and other techniques, must come to an immediate halt. It stops almost anyone who is trying to collect from you.

A few things that a creditor cannot do once the stay is in place include:

  • garnishing your wages (taking money out of your paycheck)
  • levying on your bank account (instructing the bank to withdraw funds)
  • foreclosing on your house
  • repossessing your car, or
  • moving forward with a civil lawsuit requesting a money judgment.

(If you’d like to find out more about methods creditors can use before you file for bankruptcy, see Debt Collectors, Collection Agencies & Debt Buyers.)

In most cases, the automatic stay will protect you throughout your case. But not always. If you’ve filed more than one bankruptcy case within a year, you might not receive as much—or any—protection. Depending on the number of times you’ve filed during the previous year, the stay could be limited to 30 days (you filed one other matter) or might not apply at all (you filed two or more cases). If you find yourself with this problem and want the protection of the stay, you’ll have to file a motion asking the court to extend it or put it in place. The court will consider doing so if you explain why you filed the previous case and demonstrate that you aren’t gaming the system by repeatedly filing for bankruptcy.

Also, it’s common for a creditor to file a motion to lift the automatic stay (a motion to remove the stay order) if, in a Chapter 13 case, you stop making your house payment and the creditor wants to move forward with a foreclosure. If the court grants the request, the judge will withdraw the stay order and allow the creditor to continue with collection efforts. (Learn more in the article When a Creditor Tries to Lift (Remove) the Automatic Stay.)

(For additional details, go to the Bankruptcy’s Automatic Stay topic page.)

You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only exempt property—property that is protected from creditors under state or federal law. You have to give your nonexempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors. (Learn more about bankruptcy exemptions.) In Chapter 13 bankruptcy, you don't have to give up any property. Instead, you repay your debts out of your income. But that doesn’t mean that you get to keep more property than you would have had you filed for Chapter 7 bankruptcy. All filers can protect (exempt) the same amount of assets. Here’s the difference: Only the Chapter 7 trustee sells nonexempt assets. In Chapter 13 bankruptcy you must pay for the value of the nonexempt assets you keep through your three- to five-year repayment plan. So, if you have nonexempt property that you can't bear to part with, Chapter 13 bankruptcy might be the better choice—if you can afford to pay for your nonexempt assets in addition to other required payment amounts.

You have a codebtor on a personal debt. If you file for Chapter 7 bankruptcy, your codebtor will still be on the hook, and your creditor will undoubtedly go after 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. (Learn more about what happens to codebtors in bankruptcy.)

More Information

For additional help deciding which bankruptcy is right for you, see The New Bankruptcy: Will It Work for You?, by Attorney Cara O’Neill. Or, to learn more about Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Patricia Dzikowski.

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