When is Chapter 13 Preferable to Chapter 7?

A Chapter 13 bankruptcy, also known as a wage earner plan, is preferable for anyone who has assets they wish to retain which are the collateral for a loan.   A Chapter7 bankruptcy allows debtors with assets that are the collateral for a loan to retain those assets only if the payments are current or they reaffirm or redeem the debt. 

A Chapter 13 bankruptcy is also preferable to Chapter 7 for any debtor who has substantial equity in any of his assets.  Whereas a Chapter 7 debtor may be required to liquidate assets with equity in order to pay unsecured creditors, a Chapter 13 debtor will be allowed to keep those assets as long as his Chapter 13 plan payments remain current and he is in compliance with the terms of his Chapter 13 plan and the bankruptcy rules and procedures. 

How Does a Chapter 13 Bankruptcy Work?

A Chapter 13 bankruptcy allows a debtor to reorganize his debt and repay it over a three to five year period.  In addition to the bankruptcy petition and schedules, a Chapter 13 debtor must file a Chapter 13 plan which sets forth his proposal for repaying his debts.  

A Chapter 13 plan must set forth how the following debts will be paid: 

• Mortgage arrearages;
• Auto loans;
• Domestic support obligations;
• Tax debts; and
• Unsecured debts, such as credit card debts, medical bills, and student loans. 

The Chapter 13 plan must specify how much will be paid into the Chapter 13 plan each month, whether that amount will be paid weekly, bi-weekly, semi-monthly, monthly, or annually and whether the Chapter 13 plan payments will be paid by the debtor or via income deduction by his employer.  Additionally, a Chapter 13 plan must set forth how the administrative fees and attorney’s fees will be paid.  

Who Can File a Chapter 13 Bankruptcy?

In order to file a Chapter 13 bankruptcy, a debtor must have regular and stable income.  The Bankruptcy Code also sets limits on the maximum amount of unsecured and secured debt a Chapter 13 debtor may have. 

Not all debtors qualify to file a Chapter 13 case.  If a debtor with regular and stable income has insufficient net disposable income to fund a Chapter 13 plan, his plan will not be confirmed and his case will be dismissed. 

Getting Legal Help

If you have questions about Chapter 13 bankruptcy, you should speak with an experienced bankruptcy attorney.  A bankruptcy attorney will explain how a Chapter 13 bankruptcy works and will assess your situation to determine whether you qualify to file a Chapter 13 case.