What financial conditions favor filing Chapter 13 instead of Chapter 7?
Debts and income are tied to Chapter 13 eligibility
Bankruptcy filed under Chapter 7 and Chapter 13 have several things in common. They both offer significant relief in the U.S. Bankruptcy Court. They can stop collection efforts and lawsuits by creditors. And they both discharge remaining unsecured debts, such as credit card or medical bills, when the bankruptcy is completed.
Despite their similarities, the two types of bankruptcies have their differences. While Chapter 7 is a straightforward liquidation process, choosing Chapter 13 is determined in large part by people's financial circumstances, the amount and nature of their debts and their income.
The biggest difference is that Chapter 13 filers are able to protect assets they would have to give up under Chapter 7. Often called the "wage earner's" bankruptcy, it also works better for people who have predictable income that is sufficient enough to pay reasonable personal expenses with some money left to pay off their debts over several years.
Chapter 13 is not available to all debtors who fit that description, however. According to United States Courts, there are specific debt limits - $360,475 for unsecured debts and nearly $1,081,400 for secured debts tied to tangible assets - set for this form of bankruptcy. Periodically, those amounts are raised for inflation.
Financial advantages of Chapter 13
For those who are behind in payments for major assets such as a home or a vehicle, Chapter 13 protects that property during the three to five years of the bankruptcy. The court allows debtors to make regular but reduced payments to unsecured creditors, thereby providing more money to catch up on back payments for mortgages, car loans and other bills that have greater priority.
In addition, co-signers on debts are protected under Chapter 13 but not in a Chapter 7 case. When such debts are included in a repayment plan, co-signers are protected as long as the debtor complies with the plan, according to TotalBankruptcy.
For the length of the bankruptcy, Chapter 13 filers also have the ability to address non-dischargeable debts such as student loan payments, child support or alimony, income taxes or bills related to government penalties or criminal proceedings.
People filing under Chapter 13 are better able to protect themselves from large debts they anticipate in the near future, such as medical treatments that will not be covered by insurance, reports Missouri attorney Mark Allan Roy. They have more flexibility in pursuing a later Chapter 7 bankruptcy or dismissing their current case and refiling another Chapter 13 action to include new bills.