In many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy. For instance, Chapter 7 bankruptcy is usually quicker; a debtor can keep all or most of their property; and Chapter 7 filers don't pay creditors in a three- to five-year Chapter 13 repayment plan. But not everyone qualifies to file for Chapter 7 bankruptcy. In this article, you’ll learn why Chapter 7 bankruptcy might be better for you than Chapter 13 bankruptcy.
Chapter 7 works very well for many people, especially those who:
Chapter 7 bankruptcy isn’t the best fit for everyone. It doesn’t work well for high-income filers, those with debts that won’t get wiped out (discharged), such as certain income tax debt, student loans, and domestic support obligations, and those who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy. For those individuals, Chapter 13 bankruptcy would likely be a better choice.
Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file for Chapter 7 bankruptcy, if possible. Here’s how it works:
If you have income left over subtracting allowed expenses, including payments for child support, tax debts, secured debts (such as a mortgage or car loan), you won't qualify to file for Chapter 7 bankruptcy.
(For more information on this and other Chapter 7 eligibility requirements, see The Bankruptcy Means Test.)
Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn't require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay all of your disposable income—the amount remaining after allowed monthly expenses—to your creditors for three to five years.
Here are a few other things filers find challenging:
Despite these potential problems, Chapter 13 bankruptcy is a good option for people who have a regular income to pay into a repayment plan, and who would otherwise lose their house to foreclosure or who need time to pay back tax or support arrearages.
For more information about Chapter 13 bankruptcy, see An Overview of Chapter 13 Bankruptcy.