Should I File Chapter 13 Bankruptcy If I Make Too Much Money for Chapter 7?

If you don't qualify for Chapter 7 bankruptcy because of the means test, you might consider Chapter 13 bankruptcy.

by:  , Attorney

If you make too much money to qualify for Chapter 7 bankruptcy, filing a Chapter 13 may be the right choice for you. In fact, many debtors who are eligible for a Chapter 7 choose to file for Chapter 13 bankruptcy because it provides them options and benefits not available through Chapter 7. Unlike a Chapter 7, Chapter 13 bankruptcy provides you the ability to:

  • keep all of your property including nonexempt assets
  • catch up on missed mortgage payments
  • pay off  nondischargeable  priority debts such as recent tax obligations
  • reduce your car loan balance through a  cramdown  (if all requirements are satisfied), and
  • eliminate unsecured second mortgages (or other junior liens) from your house through  lien stripping.

How Does Chapter 13 Bankruptcy Work?

In Chapter 13 bankruptcy, you pay back a certain amount of your debts through a three to five-year repayment plan. During your bankruptcy, you make monthly payments to a  bankruptcy trustee  who distributes the money to your creditors according to the terms of your plan. But just because you file for Chapter 13 bankruptcy doesn’t mean that you have to pay back all of your debts. The amount you pay depends on your income, expenses, assets, and types of debt.

For more information on how the repayment plan works, see our  Chapter 13 Repayment Plan  topic area.

Advantages of Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy offers debtors many benefits and options not available through a Chapter 7. The following are some of the most common advantages of Chapter 13 bankruptcy.

Keep All of Your Property Including Nonexempt Assets

Unlike in Chapter 7 bankruptcy, the Chapter 13 trustee does not sell your nonexempt property to pay your creditors. This is because you are paying back a portion of your debts through your repayment plan in exchange for keeping all of your assets. However, keep in mind that if you have nonexempt assets, you must pay your unsecured creditors an amount equal to their value through your plan (this is the amount they would have received if you had filed a Chapter 7).

Catch Up on Missed Mortgage Payments

Most people seek Chapter 13 bankruptcy protection to avoid foreclosure and save their home. If you are behind on your mortgage, you can catch up on any missed payments through your repayment plan while you are protected by the  automatic stay. But keep in mind that you must continue to make your ongoing mortgage payments in addition to your plan payment after your case is filed.

Pay Off Your Priority Debts

Bankruptcy does not discharge (wipe out) certain types of debt. These are commonly referred to as priority debts. Examples of priority debts include alimony, child support, and recent tax obligations. Since priority debts are nondischargeable, Chapter 13 bankruptcy offers debtors a convenient way to pay them off through their repayment plan over the next three to five years.

Cram Down Your Car Loans

If your car is worth less than what you owe on it, you may be able to reduce the balance of your loan to the value of the vehicle through a Chapter 13 cramdown. To qualify for a car loan cramdown, you must have purchased the vehicle at least 910 days (approximately two and a half years) prior to filing your case.

To learn about how you can cramdown your car loan, see our  Car Loan Cramdowns in Chapter 13 Bankruptcy article.

Get Rid of Your Second Mortgage

One of the most important benefits offered by Chapter 13 bankruptcy that is not available in Chapter 7 is the ability to remove unsecured junior liens (such as your second mortgage) from your house. This process is referred to as lien stripping. Basically, if the balance of your first mortgage exceeds the value of your house, your second mortgage (or other junior lien) is considered wholly unsecured and can be eliminated through lien stripping in Chapter 13 bankruptcy.

For more information, see  Removing a Second Mortgage in Bankruptcy.

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