When it comes to bankruptcy, the popular notion is that filing for Chapter 7 is a better option than filing for Chapter 13 bankruptcy. It is indeed easy to assume this, since Chapter 7 can wipe out most of your debts. On the other hand, chapter 13 would require you to repay some portion of your debt. But this is not always the case.
Depending on your situation, there are times when Chapter 13 may be a much better and viable option. Besides, for some debtors, they may not be eligible for Chapter 7, leaving them with Chapter 13 as the only way out.
What exactly is Chapter 13 bankruptcy?
Chapter 13 of the Bankruptcy Code provides rules for adjustments of a debt(s) an individual may have. Also known as a wage earner’s plan, it lays the groundwork for people with regular income to pay off their entire debt or a portion of it.
Unlike Chapter 7 bankruptcy, where the debtor pays off his or her debts by selling their property, Chapter 13 bankruptcy enables the debtor to keep his or her property and instead pay off debts in installments using a court-approved plan, usually within a period of three to five years.
- Businesses are not allowed to file for Chapter 13. You have to be either an individual, or jointly file as a married couple.
- You must not have had discharged any debt in Chapter 13 within the last two years, or the last four years for Chapter 7.
- You must not have any bankruptcy case that, within the last 180 days, was not dismissed.
- You have a certificate to prove that you have undergone a debt counselling program provided by an approved agency at least 180 days before filing for Chapter 13.
- Your debts are not more than $336,900 in unsecured debt, and not more than $1,010,650 in secured debt. Note that these limits are adjusted every three years for inflation.
- For the last four years, you must have filed all state as well as federal income tax returns.
- Your plan must cover all debts that has to be repaid including priority debts like unsecured debts, spousal and child support, etc; secured debts like vehicle loan, mortgages, etc; and other secured debts like tax liens.
- You must have enough regular income to cover your debts. You can even include your spouse’s income.
When Chapter 13 is a better option than Chapter 7
Depending on your issue, Chapter 13 may be a better option for you. Below are some of the issues where, contrary to popular belief, filing for Chapter 13 is a smarter move than filing for Chapter 7.
- Your vehicle loan or mortgage is due
Only when filing for Chapter 13 can you make up for missed loan payments like vehicle loan and mortgages. So, if you are behind on any of these, Chapter 13 is a better option for you.
- Your personal debt has a codebtor
If you have a codebtor and you file for Chapter 7, they will be targeted by the creditor as well. So, if you want your codebtor to be off the hook, file for Chapter 13 bankruptcy and make sure you diligently follow your proposed payment plan.
- You have certain debts that Chapter 7 cannot cover
If you have certain debts like student loans, tax obligations and other debts that Chapter 7 cannot cover, you can file for Chapter 13 to pay off such debts over time.
- You want to keep your property
If you file for Chapter 7, your non-exempt property will be sold to repay your debts. So, if you want to avoid foreclosure, and still pay off your debt, chapter 13 is a better option.