Why you should choose Chapter 13 over Chapter 7

For debtors who qualify to file a Chapter 13 plan, Chapter 13 provides them with the tools to help level the playing field with their creditors.

Chapter 7 (liquidation) allows debtors to discharge certain of their obligations, but not all obligations.  Chapter 7 debtors are not required to make monthly payments to a trustee.

Chapter 13 debtors are required to commit all their disposable income to the trustee for a determined period of time ( 3 to 5 years), but receive a broader discharge than the one a debtor receives in Chapter 7.   While the plan form in each jurisdiction is the same in each Chapter 13 case, each case is different based on the needs and obligations of the debtors.

Chapter 7 Chapter 13
Type of bankruptcy Liquidation Reorganization
Who can file? Individuals and businesses Individuals only, but includes sole proprietorships
Eligibility restrictions Income must meet the requirements of 11 U.S.C. 707 (Means Test)
  1. Individual
  2. Regular income
  3. Cannot have secured debt that exceeds $1,257,850.00 nor unsecured debt that exceeds $419,275.00.
How long does it take to get a discharge? Generally 3 to 5 months Generally 3 to 5 years
What happens to property in the case? Property which the debtor cannot exempt can be sold by the trustee for payment to creditors Debtor retains property; must pay into the plan an amount equal to the value of the unexempt assets
Can remove junior liens on overencumbered property? No Yes, by Adversary Proceeding
Reduce interest rate or principal balance on debt? Maybe if the creditor agrees to it in a reaffirmation agreement.  An approved reaffirmation agreement causes the debt to continue once the bankruptcy case is closed.  The debt is NOT discharged and the debtor is subject to state law collection means if there are missed payments after the Yes, the debtor may “cram down” many types of claims in a Chapter 13 plan and may even reduce the interest rate on claims that are not subject to “cram down.”
Benefits Debtors may discharge most consumer debts; fresh start Debtors retain their property, cure arrearages and maintain payments on significant assets such as the mortgage or car payments; can discharge pre-petition priority tax debt if paid in full—without interest and penalty–over the life of the plan; can discharge divorce settlement agreements; Fresh start
Drawbacks Reaffirmation agreements—allowing the debtor to retain certain collateral and repay creditor—are controlled by the creditor.  If a creditor doesn’t want to make an agreement and wants repossession instead, the debtor cannot force a reaffirmation agreement;