Reasons to Use Chapter 13 Instead of Chapter 7

In some situations, it makes sense to file for Chapter 13.

Many debtors choose not to file for Chapter 13 because it requires repayment of at least a portion of their debts (unlike Chapter 7, which wipes out many debts entirely ). In some situations, however, Chapter 13 is the better bankruptcy option. And certain debtors don't get to choose: Not everyone is eligible for Chapter 7.

Here are some good reasons to file for Chapter 13:

You cannot file for Chapter 7. If you have received a Chapter 7 bankruptcy discharge within the last eight years, or a Chapter 13 discharge within the last six years, you may not file for Chapter 7. In addition, you won't be allowed to file for Chapter 7 if you cannot meet some new requirements imposed by the 2005 revisions to the bankruptcy law.

Under these new rules, you cannot file for Chapter 7 if both of the following are true:

  • your current monthly income over the six months prior to your filing date is more than the median income for a family of your size in your state (go to the website of the United States Trustee, www.usdoj.gov/ust, and click "Means Testing Information" to see the median figures for your state), and
  • your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, either exceeds $166.66 per month, or exceeds $100 per month and would repay more than 25% of your unsecured, nonpriority debts (debts for which you haven't pledged collateral and which are not for child support, alimony, employee wages, or back taxes) over a five-year period. This complicated calculation is commonly referred to as the "means test" -- if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7.
The Math Can Get Confusing

As you can see, these calculations are a bit complex. And to make matters worse, Congress has its own definitions of "disposable income," "current monthly income," "expenses," and other important terms, which typically operate to make your income seem higher, and your expenses lower, than they actually are.

For information on exactly which income, expenses, and debts you should plug into these equations, see the official bankruptcy court form on which you'll have to make them: Form B22A, Statement of Monthly Income and Means Test Calculation. You can find it at the website of the federal bankruptcy courts, www.uscourts.gov/bankruptcycourts.html (click "Interim Bankruptcy Rules" to get to the forms).

You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time.

You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so.

You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only "exempt" property -- property that is protected from creditors under state or federal law. You have to give your nonexempt property to the bankruptcy trustee, who will sell it and distribute the proceeds to your creditors.

In Chapter 13, you don't have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can't bear to part with, Chapter 13 might be the better choice.

You have a codebtor on a personal debt. If you file for Chapter 7 bankruptcy, your creditor will go after the codebtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone, as long as you keep up with your bankruptcy plan payments.

Copyright 2005 Nolo