Should You File for Chapter 13 Bankruptcy Even if You Qualify for Chapter 7?

Chapter 13 bankruptcy might be better than Chapter 7 if you are behind in your mortgage, want to keep nonexempt property, or have tax or child support debts, among other reasons.

by: , Attorney

For many debtors, it makes sense to file for Chapter 13 bankruptcy even if they qualify for a Chapter 7. Chapter 13 bankruptcy might be better if you want to keep property you would otherwise lose in Chapter 7, you are behind in your mortgage and want to save your home, or you have tax debts or other debts that won't be paid off in Chapter 7, to name just a few things.

Because each type of bankruptcy has its own pros and cons, whether Chapter 13 bankruptcy will be in your best interest typically depends on:

  • whether you have any nonexempt property
  • the types of debt you are trying to eliminate, and
  • what you hope to accomplish in your bankruptcy.

When Does It Make Sense to File for Chapter 13 Bankruptcy Instead of Chapter 7?

Many people prefer Chapter 7 bankruptcy, if they qualify, because they can often cancel all or most of their debts and be done in three to four months. But Chapter 7 is not always the best choice, even if you qualify (you must pass the Chapter 7 means test to be eligible for Chapter 7 relief). It might be in your best interest to file for Chapter 13 bankruptcy under the following circumstances.

You Want to Keep Your Nonexempt Assets

If you own any nonexempt property, the trustee in Chapter 7 bankruptcy can liquidate it to pay your creditors. (Learn about how exemptions protect your assets in bankruptcy.) But if you file a Chapter 13 case, you are allowed to keep all of your property including your nonexempt assets.

In exchange for keeping your property, you must pay back a certain amount of your debts through a repayment plan. While your plan must pay your creditors at least as much as they would have received in a Chapter 7 (this is called the best interest of creditors test), it may still be in your best interest to file for Chapter 13 bankruptcy if you wish to hold on to your nonexempt property.

You Want to Cure Your Mortgage Default

In most cases, your mortgage is classified as a secured debt in bankruptcy. This is because your lender typically has a security interest in your home (meaning that if you default on your mortgage payments, it can foreclose on your house).

If you file for Chapter 7 bankruptcy, you can usually delay the foreclosure process for a few months. But a Chapter 7 doesn’t provide a way for you to get caught up on your missed payments.

In contrast, Chapter 13 bankruptcy will allow you to catch up on your mortgage arrears through your repayment plan and potentially save your home. In general, if you make timely plan payments and pay your ongoing mortgage payments as they come due, the lender can’t foreclose on your house because of the bankruptcy’s automatic stay. Once you complete your plan, you will be current on your mortgage payments and able to keep your home. (Learn about how Chapter 13 bankruptcy can help you save your home.)

You Want to Reduce the Amount of Your Car Loan or Gain More Time to Pay It

Like your mortgage, if you are behind on your car loan payments, Chapter 13 bankruptcy can allow you to catch up through your repayment plan. Including your car loan in your Chapter 13 plan can also make your payments more affordable by stretching them over the life of your bankruptcy (which can last three to five years).

In addition, you may be able to cram down your car loan in Chapter 13 bankruptcy. If you satisfy certain requirements to qualify, a car loan cramdown may allow you to reduce your principal balance or lower your interest rate on the loan. (Learn about how a Chapter 13 car loan cramdown works.)

You Want to Get Rid of Your Second Mortgage or HELOC

If the balance of your first mortgage (or other senior liens) exceeds the value of your home, you may be able to eliminate your second mortgage (or other junior liens) in bankruptcy through a process called lien stripping. (Learn more about lien stripping.)

Except in the 11th Circuit (which has jurisdiction over Alabama, Florida, and Georgia), you can typically only strip your second mortgage in Chapter 13 bankruptcy (but not in a Chapter 7). In a few recent decisions, the 11th Circuit Court of Appeals allowed debtors to use lien stripping in Chapter 7 bankruptcy. But one of the 11th Circuit cases has been appealed to the U.S. Supreme Court and may be overturned. (Learn more about whether you can eliminate a second mortgage in Chapter 7 bankruptcy.)

Because the 11th Circuit has jurisdiction over only a few states, most debtors can strip their second mortgage only in Chapter 13 bankruptcy. In addition, some bankruptcy judges in the 11th Circuit still don’t allow lien stripping in Chapter 7 cases. This means that even if you live under the jurisdiction of the 11th Circuit, whether or not you can strip your second mortgage in a Chapter 7 will depend on your specific bankruptcy judge and your particular circumstances.

You Want to Pay Off Your Nondischargeable Priority Obligations

Your bankruptcy discharge doesn’t wipe out certain types of obligations (called nondischargeable debts). Some nondischargeable debts also have priority status in bankruptcy (meaning that they get paid before other obligations).

The most common nondischargeable priority debts include domestic support obligations (such as alimony and child support) and certain taxes. If most of your debts are priority and nondischargeable, filing a Chapter 7 case won’t help you. But in Chapter 13 bankruptcy, you can pay off your priority debts in your repayment plan over the next three to five years.

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