Which Chapter is Better Between Chapter 13 Bankruptcy and Chapter 7 Bankruptcy?

Many debtors find chapter 7 bankruptcy to be more favorable than chapter 13 bankruptcy because the former wipes out all outstanding qualifying debt while the latter requires the payment of some debts. While this sounds good on paper, it is not that simple.

Each bankruptcy option serves a unique purpose. For instance, a homeowner hoping to save their home from being foreclosed on will not find the necessary tools for their case in chapter 7 bankruptcy, but chapter 13 bankruptcy addresses this well. Also, the debtor may not be eligible for chapter 7 and so they will have no choice but to file for chapter 13 bankruptcy.

Appealing Reasons for Filing for Chapter 13 Bankruptcy

It's your only option. If you cannot file for chapter 7 bankruptcy, then chapter 13 is your only option. Why can't you file for chapter 7?

• Your current income is greater than the median income for a household your size in your location.
• Your disposable income is greater than what the law requires. The figure is reached after subtracting some of the debt repayments required in chapter 13 bankruptcy and other monthly expenses in what is referred to as a "means test". If you still have a certain level of income left after repaying these expenses, then you are said to have the means to pay what you owe under the chapter 13 repayment plan and therefore, are unqualified for chapter 7 bankruptcy.

The calculations in the means test are quite complex. They use some parameters that can give the impression of a higher income and expenses lower than they actually are.

When Chapter 13 Trumps Chapter 7

Sometimes, chapter 13 bankruptcy may be more beneficial than chapter 7 bankruptcy even if you qualify for the latter. Here are some scenarios:

You have debts that must be paid off. A chapter 13 plan gives you three to five years to pay off those debts that you can't shake off. These obligations include tax due and domestic support.

You have overdue mortgage payments. Chapter 13 allows you to make mortgage payments even when you have fallen behind so that you don't lose your home or car. This provision is not available in chapter 7 bankruptcy.

You need some more time. You have every intention of repaying what you owe but you find this hard to do with creditors breathing down your neck. The Bankruptcy chapter institutes an automatic stay that gives you 3 to 5 years to repay these debts.

The Automatic Stay and How it Works

After filing for bankruptcy, an automatic stay comes into effect, stopping creditors from contacting you about payment - apart from those demanding spousal and child support. The law bars your creditors from doing any of the following: 

• Foreclose on your property
• Repossess your car
• Instruct your bank to withdraw funds
• Take money from your paycheck
• Move forward with court cases demanding cash payments from you.

The automatic stay will only protect you from your creditors if you haven't filed for more than one bankruptcy within the year. It is limited to 30 days if you filed for protection at least one time the previous year or you could get none if you applied for at least two cases.

If you do not qualify for an automatic stay but still need protection, you will have to apply to the court to put one in place, but it will only be availed if you prove that the application is genuine.

A creditor - in a chapter 13 case - can apply to the court to lift an automatic stay if you stop making your house payments. The creditor could apply to move forward with foreclosure. If the request is granted, the stay is lifted and the creditor is free to collect as they deem fit.

You have property that is nonexempt. Chapter 7 bankruptcy allows you to keep exempt property - essentially property that is protected by state and/or federal law, and so cannot be touched by creditors. You are required to pass on your nonexempt property to the bankruptcy trustee who is authorized to sell it to repay your creditors.

Chapter 13 bankruptcy puts in place a payment plan that you honor from your income and so no property has to be sold. Note, though, that this does not give you the upper hand when it comes to protection of property as both chapters allow you to exempt the same amount of property.

Co-debtors on personal Loans. If someone co-signed a personal loan for you, they will be in the hook under chapter 7 bankruptcy. The creditor can go after them if you are unable to meet your obligation. By contrast, no one will bother your co-signor under chapter 13 bankruptcy as long as you meet your bankruptcy plan payments.