When Is Chapter 13 Bankruptcy A Better Option Than Chapter 7?

By Author: Samantha Collander
Total Articles: 11
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If you've started thinking about bankruptcy, you should know that whether or not to file is just one of the decisions you'll have to make. There are others, like whether or not you should file with your spouse. But another important one is whether or not you should file Chapter 13 or Chapter 7 bankruptcy. There are good reasons to file Chapter 13 instead of Chapter 7, and I wanted to share some of them.

First, the primary difference between Chapter 13 and Chapter 7 is that Chapter 7 will allow the court to enter your discharge order about 90 days after we file your petition. The discharge order means that you're no longer legally liable for all of your dischargeable debts (things like child support, alimony, court restitution and a few others are not dischargeable). You don't have to repay any of those debts. Chapter 13 requires you repay a certain amount of your debt back, depending on what your income and allowable expenses are. Your repayment period will last between three and five years. If you have any debt left at the end of that period, it will be discharged just like Chapter 7.

One big reason people choose ...
... Chapter 13 is that it will allow them to get caught up on their mortgage. If you've fallen behind in your payments, you can pay the arrears over the course of three to five years. Of course you have to be able to afford to pay the arrears as well as your regular mortgage payment, so if you've fallen too far behind Chapter 13 may not be possible. Chapter 7 will not let you get caught up on mortgage payments.

Chapter 13 will also allow you to "strip" a second mortgage, which will convert it to an unsecured debt (like a credit card). When your Chapter 13 is closed, you'll only owe your first mortgage. To be able to strip, your home must be worth less (based on a comparable market analysis) than what you owe on your first mortgage. Chapter 7 will not you strip a second (or third) mortgage.

Chapter 13 will also eliminate a few additional debts that Chapter 7 won't. For example, if you've agreed to pay certain of your ex-spouse's debts or expenses in a divorce agreement that are not in the nature of spousal support, you can discharge that obligation. We'll have to carefully review your divorce agreement to give you a definitive answer on whether or not those obligations are dischargeable. Even then you can expect that your ex-spouse may object.

Finally, you may not have a choice but to file Chapter 13. Chapter 7 requires that your income be below a certain amount. When you come in for a consultation, we can give you a better idea of whether your income qualifies. Basically, it must be below the median income for your household size as determined by the U.S. Census Bureau.

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