Is It Better To File A Chapter 7 or 13 Bankruptcy?

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

By , Attorney

In many cases, Chapter 7 bankruptcy is a better fit than Chapter 13 bankruptcy. For instance, not only is Chapter 7 quicker, many people prefer the following two things, as well:

  • filers keep all or most of their property, and
  • filers don't pay creditors through a three- to five-year Chapter 13 repayment plan.

But not everyone qualifies to file for Chapter 7 bankruptcy—and in some cases, Chapter 7 doesn't provide the help needed. Find out when Chapter 7 bankruptcy might be more advantageous than Chapter 13 bankruptcy.

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 this chapter, 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 debts get wiped out. A filer emerges debt-free except for "nondischargeable" debts like student loans, recent taxes, and unpaid child support.
  • You can protect property. Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything they own using bankruptcy exemptions. Bankruptcy lets you protect most necessities, and if you don't have much in the way of luxury goods, you'll likely be able to "exempt" or protect all or most of your property.
  • You can keep a house or car in some situations. You can also keep your home 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.

Who Should File for Chapter 7 Bankruptcy?

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

  • own little property
  • have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy), and
  • whose family income doesn't exceed the state median for the same family size.

You'll take the means test to see if your income qualifies for this chapter. If your income is below the average for a family of the same size in your state, you'll automatically be eligible.

If your income is higher than the median, you'll have another opportunity to pass. However, suppose after subtracting allowed expenses, including payments for child support, tax debts, secured debts (such as a mortgage or car loan), you have income left over to make a significant payment to your creditors called disposable income. In that case, you won't qualify to file for Chapter 7 bankruptcy.

When Chapter 13 Might Meet Your Needs

Chapter 7 bankruptcy isn't the best choice for everyone. Chapter 7 won't help people whose debts won't get "discharged" or wiped out, like particular income tax debt, student loans, and domestic support obligations. High-income filers find it hard to qualify. It's also not a good fit for people who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy or those facing foreclosure or repossession. For those individuals, Chapter 13 bankruptcy would likely be a better choice.

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.

What Is Disposable Income in Chapter 13 Bankruptcy?

Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Your disposable income will determine whether you qualify to discharge debt in Chapter 7 or Chapter 13 bankruptcy.

When you claim your deductions, you'll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you'll use the national and local standards.

Here's a list of some of the deductions you'll be allowed to take:

  • food and clothing
  • housing and utilities
  • transportation costs
  • taxes
  • involuntary payroll deductions
  • life insurance
  • court-ordered payments, such as family support
  • certain education costs
  • childcare expenses, and
  • health care costs.

To determine your disposable income, you'll complete one of two forms, depending on the chapter you intend to file (each chapter allows for similar deductions).

In a Chapter 7 case, you'll complete the Chapter 7 Means Test Calculation form. You'll deduct allowed expenses to find your disposable monthly income. Next, you'll multiply that amount by 60 months. If the figure exceeds the maximum allowed amount, you won't qualify for a discharge. Additionally, you might not be eligible if your disposable income is sufficient to pay 25% or more of your unsecured, nonpriority debt (such as credit card balances, medical bills, and personal loans).

In a Chapter 13 matter, you'll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount remaining after deducting expenses is your monthly disposable income. You'll pay your disposable income to your unsecured, nonpriority creditors in your three- to five-year repayment plan.

Because each case is different, determining whether you qualify for bankruptcy can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney.

Here are a few other things filers find challenging about Chapter 13 bankruptcy:

  • 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 in 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 genuine risk of debts not being discharged.

Despite these potential problems, Chapter 13 bankruptcy is a good option for people with regular income who would otherwise lose their house to foreclosure or need time to pay back tax or support arrearages.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you need anything else!

Providing all information needed to file for bankruptcy is beyond the scope of this article. If you'd like to file without an attorney, a self-help book like How to File Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer J.D. or Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Cara O'Neill (Nolo) can help you make well-informed decisions about your bankruptcy matter.

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