Chapter 7 vs. Chapter 13

If the non-bankruptcy alternatives are not feasible, most consumer debtors must choose between a liquidation proceeding under Chapter 7 of the Bankruptcy Code and a debt adjustment proceeding under Chapter 13 of the Bankruptcy Code. A brief description of a Chapter 7 case can be found by clicking here, or on the Chapter 7 FAQ's button in the left margin. A brief description of a Chapter 13 case can be found by clicking here, or on the Chapter 13 FAQ's button in the left margin. These sections should be consulted if the reader is unfamiliar with such proceedings.

The following factors should be considered in determining whether Chapter 7 or Chapter 13 is more appropriate for a consumer debtor:

(1) THE DISCHARGEABILITY OF THE DEBTOR'S DEBTS. There are 17 classes of debts that are not dischargeable under Chapter 7. Under Chapter 13, debts for alimony, maintenance, or support, debts for death or personal injury related to drunk driving, debts for criminal fines and restitution, most debts for student loans, debts not covered by the plan, and installment debts maturing after the close of the plan are not dischargeable. If a debtor has substantial debts that are dischargeable under Chapter 13 and non-dischargeable under Chapter 7, Chapter 13 may be preferable Chapter 7 for the debtor. The eligibility of the debtor for a discharge may also be a factor to consider. A person who has received a Chapter 7 discharge in a case that was filed within the last six years is not eligible for a Chapter 7 discharge, but is eligible for a Chapter 13 discharge.

(2) RETAINING THE DEBTOR'S SECURED PROPERTY. A debtor who is in default on an important secured obligation, such as a home mortgage or an automobile loan, is usually permitted to cure the default within a reasonable period under Chapter 13 and thereby retain the secured property. The curing of defaults in secured obligations is not usually feasible in a Chapter 7 case. However, under Chapter 7 the debtor is permitted to redeem or set aside liens against certain exempt personal property.

(3) RETAINING THE DEBTOR'S NON-EXEMPT ASSETS. Under Chapter 7 a debtor must turn all non-exempt property (or it's cash equivalent) over to the trustee. Under Chapter 13 a debtor is usually permitted to retain his or her non-exempt property, provided that meaningful payments are made to unsecured creditors. Thus, if a debtor has a large equity in his or her home or other important non-exempt assets, Chapter 13 may be preferable.

(4) THE DEBTOR'S INCOME. In order to qualify under Chapter 13, a debtor must have "regular income," which is defined as income sufficiently stable and regular to enable a debtor to make payments under a Chapter 13 plan. If a debtor is unemployed or otherwise devoid of regular income, a Chapter 13 case may not be feasible. On the other hand, Chapter 7 may not be feasible for a consumer debtor who has sufficient income with which to repay a significant portion of his or her debts within a reasonable period because the chapter 7 case of such a debtor may be dismissed by the court as an abuse of Chapter 7.

(5) THE DEBTOR'S ATTITUDE TOWARDS HIS OR HER DEBTS. If a debtor has a sincere and realistic desire to repay all or most of his or her unsecured debts, Chapter 13 is usually preferable. If a debtor desires to repay only one or two debts, the best practice may be to file under Chapter 7 and later reaffirm the debts that the debtor wishes to repay. Finally Chapter 7 is preferable for the debtor who simply wishes to obtain a fresh financial start by discharging all debts as quickly and inexpensively as possible.

(6) THE TIME AND EXPENSE FACTOR. Chapter 13 cases normally last from three to five years, with a discharge granted at the close of the case. Chapter 7 cases of typical consumer debtors last about six months, and a discharge is normally granted about four months after the case is filed. In Chapter 13 cases, the attorney's fees and administration expenses are considerably more than in Chapter 7 cases. If a debtor is unable or unwilling to make meaningful payments and otherwise comply with a Chapter 13 plan during the entire duration of the plan and to bear the additional expenses involved, a Chapter 13 case may not be in the debtor's best interest. Also, if anything is likely to occur during the duration of the case that would diminish or eliminate the debtor's ability to make payments under a plan, then a Chapter 13 case may not be advisable.