One of the main reasons people don’t seek the protection of bankruptcy is because there are so many misconceptions out there. Some people think it simply bad to file bankruptcy. Others think Chapter 7 is better than Chapter 13, or vice versa. The truth is that bankruptcy is a tool that the Constitution has provided us to ensure that people don’t become wards of the state when times get tough. And times certainly get tough for different people, for different reasons. This blog is intended to highlight when Chapter 13 bankruptcy is better than Chapter 7 bankruptcy.
Some debtors simply cannot file for Chapter 7, which leaves Chapter 13 as the only reasonable option. A debtor can not file for Chapter 7 if her current monthly income over the six months prior to filing is more than the median income for a similar household and her disposable income, after subtracting certain expenses, is higher than the limits set by the law. This can be very complicated, but the short version is that some folks just aren’t eligible for Chapter 7.
Another good reason to file Chapter 13 over Chapter 7 is when the debtor is behind on her mortgage payments or car payments. The options in Chapter 13 are much better for these situations. A Chapter 13 plan can allow the debtor to make up the back payments over time and get back into the terms of the original agreement. This is not possible in Chapter 7 bankruptcy.
Some people have too many assets to protect with bankruptcy exemptions and they want to keep them all. A debtor who is otherwise eligible for Chapter 7 might have to allow the trustee to sell her jet skis or her ’57 Chevy. If the debtor instead puts forth a Chapter 13 plan that pays a certain percentage of unsecured crediors, the debtor can keep those assets and still get many of the benefits of the bankruptcy.
Another reason Chapter 13 can be better than Chapter 7 is that tax obligations, student loans, or other nondischargeable debts can be included in the plan to pay over time. It’s very hard to get out from under tax debt, so using Chapter 13 can relieve some of the pressure and allow the debtor to satisfy the IRS.
Finally, most people have a sincere desire to pay back those that lent them money. But if they’re coming at the debtor with lawsuits, garnishments, and levies, it’s not possible. So, by filing a Chapter 13 bankruptcy, the debtor can stop those tactics while still paying back some or all of the debt.
The overall theme to this story is that there is no one type of bankruptcy that is better than the other. It always depends on the specific facts and situations in which the debtor finds herself. With the assistance of an experience bankruptcy law firm, the best possible solution is just around the corner.