Tips for Choosing between Chapter 7 and Chapter 13

Chapter 7 or Chapter 13 – What’s Better for Your Situation

Chapter 7 and Chapter 13 bankruptcy are quite different. How do you know which chapter of bankruptcy is better for you?

For many people, there won’t be a choice. They’ll qualify for whichever type of bankruptcy is the better option for them and proceed with little to no choice in the matter. Everyone filing is subject to a means test that evaluates assets, debts, and other financial criteria, and for most people, the best choice is clear.

You can read more about the bankruptcy means test here.

But what if you fall into the group of filers who do have a choice?

Is one option better than the other? And what if things change at some point and your original choice is no longer the best option?

Here’s what you need to know when you’re faced with a choice between Chapter 7 and Chapter 13.

Chapter 13 vs. Chapter 7

Chapter 13 bankruptcy filing allows you to discharge a wider variety of debts than Chapter 7. Chapter 13 filers also have a longer period of protection under the automatic stay. And in most cases, Chapter 13 also allows you to retain ownership of more of your assets than Chapter 7. But this doesn’t mean Chapter 13 is always better than Chapter 7.

Chapter 13 requires you to make payments on your debt for a period of three to five years. It’s sometimes called “wage earners’ bankruptcy” for this reason. You aren’t free and clear of your debts for a long time in Chapter 13 and if you have no income you aren’t going to qualify for Chapter 13 bankruptcy filing.

But in some cases, a person will qualify for both types of bankruptcy and need to make a decision. It might seem as if Chapter 13 is the preferred option because you get more protection and are allowed to keep more assets, in exchange for repayment you can afford.

This isn’t always the case.

Someone who knows his or her earnings will increase over the next three to five would likely be better served by filing for Chapter 7.

One of the benefits of Chapter 13 is that if something changes during your repayment period, you can modify the amount of your monthly payment. If you lose your job or have a decrease in income, the court can be asked to reduce your payments. It’s even possible in drastic situations to convert your Chapter 13 case to a Chapter 7.

Chapter 13 Requires a Long-term Commitment

But the opposite is also true. If you see an increase in income during that period, the trustee would ask the court to modify your payments to reflect this increase. You’d be earning more money but a lot of the increase would go to creditors, whereas in Chapter 7 the increase would be a moot point because your case would be closed. You’d be able to pay more toward the debts you still owe that were not discharged in Chapter 7, but the situation would be under your control. You’d be choosing to pay creditors more, not the trustee.

Chapter 7 is about the here and now and decisions by the court are based on your current situation. In Chapter 13, the court evaluates your current situation, but will also look at future developments. You’re making a multi-year commitment to having your financial situation exposed to the court, so you if you reasonably expect your financial situation will significantly improve during that time, you might want to think twice about filing for Chapter 13.

If you’re unsure which chapter of bankruptcy is right for you or you need assistance assessing your financial prospects in the near future, we can help. Contact the Law Office of Robert M. Geller at (813) 254-5696 to discuss your situation.