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.

Although most people don’t want to pay into a three- to five-year repayment plan, Chapter 13 offers many benefits not available in Chapter 7. So even if you make too much to qualify for Chapter 7, filing Chapter 13 might be the right choice. For instance, in Chapter 13, you can:

  • keep all of your property
  • catch up on missed mortgage or car payments
  • pay off debts you can’t wipe out, like domestic support obligations
  • reduce your car loan balance, and
  • eliminate a second mortgage or another junior home loan.

Keep in mind that all of these benefits come with separate qualification requirements. For example, you might need sufficient income to pay off a debt, or your loan might need to be old or underwater.

How Chapter 13 Bankruptcy Works

Failing the Chapter 7 means test—the test that qualifies you for Chapter 7—tells the court that you have sufficient income to repay at least some of your debts through a repayment plan. That’s what you’ll do in Chapter 13 bankruptcy. You’ll pay back a certain amount of your debts through a three to five-year plan.

The Chapter 13 bankruptcy trustee distributes the money to your creditors according to the plan terms. That doesn’t mean that you have to pay back all of your debts. The amount you’ll pay will depend on your income, expenses, assets, and debt type. You’ll typically pay the greater of:

  • disposable income—the amount left after deducting necessary expenses
  • priority debts—obligations you must pay in full, such as recently-incurred taxes, or
  • nonexempt assets—property you can’t protect with a bankruptcy exemption.

Find out more about what happens in Chapter 13 bankruptcy.

Chapter 13 Advantages and Disadvantages

Here are some of the many benefits and options not available through Chapter 7, as well as the hurdles they present for some filers.

You Can Keep Your Property in Chapter 13 Bankruptcy

In both Chapter 7 and Chapter 13, you’re allowed to keep property you’ll need to work and live. Your state sets out the property you can protect in exemption statutes. In Chapter 7, the trustee sells nonexempt property that you can’t protect and distributes the proceeds to your creditors.

Unlike Chapter 7 bankruptcy, the Chapter 13 trustee doesn’t sell your nonexempt property to pay your creditors. But that doesn’t mean you get a windfall. You’ll pay the value of your nonexempt assets and a portion of your debts through your repayment plan. The cost of your nonexempt assets is the same as the value of the assets the trustee would sell in Chapter 7. In exchange, you’ll keep all of your assets.

Of course, this advantage comes at a price. The filer must have sufficient income to pay for the nonexempt property through the plan. If it isn’t feasible to do so, a debtor would have to consider other options. Options could include selling the property and paying off debts directly, or putting the sales proceeds toward the plan repayment.

Find out what happens if you try to hide nonexempt assets in bankruptcy.

Catching Up on Missed Mortgage Payments With Chapter 13 Bankruptcy

Many people seek Chapter 13 bankruptcy protection when they’ve fallen behind on mortgage payments but want to keep their home. The automatic stay stops collection activities and helps the filer avoid foreclosure. The debtor must continue to pay the monthly payment while catching up on the missed payments. While it can be costly, the missed payments are spread out over three to five years.

A filer without sufficient income to cover the current payment, the missed payments, and other required Chapter 13 obligations, won’t get repayment plan court approval (confirmation). It’s likey that the filer would need to let the home go back to the bank to proceed with Chapter 13. Some courts offer loan modification assistance. You should be able to learn more by consulting a local bankruptcy attorney.

Chapter 13 Repayment Plans Help You Pay Off Nondischargeable Debts

Bankruptcy doesn’t discharge (wipe out) certain types of debts, called nondischargeable debts. In Chapter 13, debtors can pay off a nondischargeable debt over time without fear of collection actions such as a wage garnishment or loss of property.

Here’s the downside of this benefit: If the debt is also a priority debt, the debtor must pay it in full in a Chapter 13 plan. Examples of priority nondischargeable debts include alimony, child support, and recent tax obligations. A filer who doesn’t have sufficient income to pay off priority debts in full won’t be able to confirm a plan and won’t qualify for Chapter 13.

Cramming Down a Car Loan in Chapter 13 Bankruptcy

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

In this situation, you’ll need to repay the entire cramdown amount in your repayment plan. Find out more about how car loan cramdowns work in Chapter 13 bankruptcy.

Chapter 13 Can Get Rid of a Second Mortgage

One powerful benefit offered by Chapter 13 bankruptcy but not Chapter 7 is the ability to remove unsecured junior liens (such as your second mortgage) from your house in a process known as lien stripping. If the balance of your first mortgage exceeds the value of your home, your second mortgage or another junior lien is considered wholly unsecured. In that instance, it can be eliminated through lien stripping in Chapter 13 bankruptcy.

The downside is that you’ll have to prove the value of your home to the court. Hiring an appraiser to testify can be costly—as well as paying for your attorney’s time. Although if you’re paying a lot of unsecured debt, the attorney might be able to roll it into your plan payment without changing the monthly amount. Find out more about removing a second mortgage in bankruptcy.

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