When Chapter 7 Bankruptcy Is Better than Chapter 13 Bankruptcy

For many debtors, Chapter 7 bankruptcy is a better option than Chapter 13 bankruptcy.

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.

Who Should File for Chapter 7 Bankruptcy?

Chapter 7 works very well for many people, especially those who:

  • don’t have a lot of property that they’d like to keep
  • have credit card balances, medical bills, and personal loans (these debts get wiped out in this chapter), and
  • whose family income doesn’t exceed the state median for the same family size.

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.

Advantages of Chapter 7 Bankruptcy

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:

  • It’s relatively quick. A typical Chapter 7 bankruptcy case takes three to six months to complete.
  • No payment plan. Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
  • Many, but not all debts get wiped out. The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support. (For more on these "nondischargeable" debts, see What Is a Nondischargeable Debt?)
  • You can protect property. Although you can lose property in Chapter 7 bankruptcy, most filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don't have much in the way of luxury goods, the chances are that you'll be able to exempt (protect) all or most of your property.
  • Keeping a house or car. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property. (Find out what you can protect in Bankruptcy Exemptions by State.)

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.)

Drawbacks of Chapter 13 Bankruptcy

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:

  • You must complete the entire three- to five-year repayment plan before any qualifying debt balances get wiped out (unless the court lets you off the hook early for hardship reasons).
  • If you owe nondischargeable past due taxes, or support arrearages, you’ll have to pay off the entire balance in your plan (many people don’t have sufficient income to do so).
  • To keep a house or car, you’ll need to repay the arrearages over the course of your plan (while continuing to pay your regular monthly payment).
  • Many people who file for Chapter 13 bankruptcy don't complete their plans, so filers run a very real risk that their debts won't be discharged ultimately.

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.

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