In this article, we explain when it makes sense to file a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy. We will answer the following questions: (1) “what is the difference between a Chapter 13 Bankruptcy and a Chapter 7 bankruptcy?” (2) “when does it make sense to file a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy?,” and (3) “what are the eligibility requirements for a Chapter 13 bankruptcy?”
For some foundational information about the Chapter 7 bankruptcy process, you can check out our article, The Chapter 7 Bankruptcy Process Explained.
A Chapter 7 bankruptcy completely wipes out all of the debtor’s dischargeable debts while a Chapter 13 bankruptcy provides for the payment of some or all of the debtor’s debts over the course of 3 to 5 years. If, based on the debtor’s income, the debtor will not be able to pay off the full amount of the debts during the allotted time period in a Chapter 13 payment plan, the plan may provide for payment of a portion of the debts, with the remainder of the debt being discharged at the conclusion of the payment plan.
In both a Chapter 13 bankruptcy and a Chapter 7 bankruptcy, an “automatic stay” on collection of debts prevents creditors from taking any collection action while the case is ongoing. In the context of Chapter 13 bankruptcies, this means that creditors cannot take action against the debtor for the duration of the 3 to 5 year payment plan so long as the debtor continues to make payments according to the plan.
In a Chapter 7 bankruptcy, the debtor’s assets that are not exempt from bankruptcy liquidation are collected by the trustee and distributed to the debtor’s creditors in order to satisfy the debtor’s debts. In a Chapter 13 bankruptcy, the debtor is permitted to keep his or her assets and, instead, his or her income over the course of the plan is used to satisfy the debts.
All things being equal, it is more advantageous to debtors to wipe out all of their dischargeable debts immediately through a Chapter 7 bankruptcy than to repay some or all of the debt over the course of 3 to 5 years through a Chapter 13 bankruptcy. However, there some scenarios where a Chapter 13 bankruptcy is the best option:
Chapter 7 cases may be converted to Chapter 13 cases if the debtor’s situation changes or information is discovered that would make a Chapter 13 case more appropriate for the debtor’s situation.
In order to be eligible for a chapter 13 bankruptcy, the debtor’s unsecured debts must be less than $394,725 and his or her secured debts must be less than $1,184,200. A secured debt is a debt, like a mortgage or a car loan, for which the creditor can take back certain property (“collateral”) from the debtor if the debt is not paid. An unsecured debt is a debt for which there is no collateral.
If a previous bankruptcy case was dismissed based on the debtor’s willful failure to appear in court or to comply with the court’s orders, or if the case was voluntarily dismissed after a creditor requested relief from the automatic stay, a Chapter 13 case may not be filed within 180 days of the dismissal.
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