It’s important to sort out the issues and decide which form of bankruptcy is best for you. Many debtors assume that Chapter 7 bankruptcy is better than Chapter 13 bankruptcy because Chapter 13 requires debtors to repay a portion of debt, whereas Chapter 7 wipes out most debts. But this is not always the case. Here are some good reasons to file for Chapter 13 bankruptcy.
You Are Not Eligible for Chapter 7 Bankruptcy
Some debtors cannot file for Chapter 7 — leaving Chapter 13 bankruptcy as the only option. You cannot file for Chapter 7 if both of the following are true:
- Your current monthly income over the six months prior to 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 commonly referred to as the “means test” — if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy. (For more information, including links to the median income in your state and an online calculator you can use to see whether you pass the means test, see our articles in The Chapter 7 Means Test.)
The means test can get fairly complex — and, to make matter worse, Congress has its own definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms, which sometimes operate to make your income seem higher than it actually is. You can find step-by-step instructions to determine if you qualify for Chapter 7 under these rules in How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
There are a few other eligibility criteria for filing for Chapter 7. For example, you cannot get another Chapter 7 discharge if you have received a Chapter 7 bankruptcy discharge within the last eight years, or a Chapter 13 bankruptcy discharge within the last six years. (Learn about these other Chapter 7 eligibility rules.)
When Chapter 13 Bankruptcy Might Be Better Than Chapter 7
Even if you are eligible for Chapter 7 bankruptcy, there are some situations when filing for Chapter 13 may be more advantageous than filing for Chapter 7.
You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. 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.)
You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time. (To learn more, see Your Debts in Chapter 13 Bankruptcy.)
You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. This might be the case if creditors are coming after you, or if you simply require the formal structure and deadlines the Chapter 13 process provides in order to follow through on your good intentions.
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 7.) In Chapter 13 bankruptcy, you don’t have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can’t bear to part with, Chapter 13 bankruptcy might be the better choice.
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. (Learn more about codebtors in Chapter 7 bankruptcy.) 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.