Which Kind of Bankruptcy is Better for Me: Chapter 7 or Chapter 13?

Most consumer bankruptcies in the Unites States are either Chapter 7 or Chapter 13 cases. Consumers can also file Chapter 11, but Chapter 11 is “overkill” for the average consumer.

So, the question of which chapter to file under usually boils down to Chapter 7 vs. Chapter 13.

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Chapter 7 Bankruptcy:  Pros and Cons

Our office starts off by considering whether a Chapter 7 would accomplish what the client wants to accomplish.

This is because Chapter 7 is usually much less expensive than Chapter 13, wipes out most debts, and lasts only a few months.

The downside to Chapter 7 is the bankruptcy trustee theoretically can sell your non-exempt assets to pay your creditors.

But, Chapter 7 bankruptcy filers very rarely have non-exempt assets.  (In my practice, it is basically never.) So, this usually is not an issue.

Chapter 13: Pros and Cons

Chapter 13 is more expensive, takes 3-5 years, and often requires you to make payments to your creditors (though these payments are based on your disposable income, i.e. your ability to pay.)

But, sometimes a person really needs a Chapter 13 to accomplish their goals. This is because some forms of relief are only available in Chapter 13.

Questions to Ask Yourself: Chapter 7 vs. Chapter 13

The analysis can be greatly simplified by asking yourself these questions:

  1. Do I qualify for Chapter 7?
  2. Do I have non-exempt assets that would be at risk if I filed Chapter 7?
  3. If Chapter 7 if otherwise a good fit for me, is there any relief I need that is only available in Chapter 13?

Relief Only Available in Chapter 13

Some forms of relief are only available in Chapter 13.  They include the ability to:

  1. Strip off unsecured junior mortgages
  2. Catch up over time on past due mortgage or car payments
  3. Pay child support arrearages and non-dischargeable tax debts over a long period of time (often resulting in lower monthly payments)
  4. Discharge some civil and criminal penalties that are not dischargeable in Chapter 7
  5. Reduce the principal loan balance on secured debts through a loan “cramdown” (most often used for car loans)
  6. Delay student loan payments while you are in bankruptcy or reduce the amount of your monthly student loan payments (technically, you can also delay student loan payments in Chapter 7– but only a few months.)
  7. Keep non-exempt assets (as long as you can make monthly payments through your plan to compensate your unsecured creditors for the value of the non-exempt asset)
  8. File bankruptcy again even if you filed Chapter 7 (and received a discharge) less than 8 years ago
  9. Other forms of relief.

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The above analysis is greatly simplified for the sake of presenting the big picture. It is not a substitute for a bankruptcy consultation with an experienced bankruptcy attorney.

Our office offers a free bankruptcy analysis. Let us know if we can help.