Who Should File for Chapter 13 Bankruptcy

Of the two most common forms of bankruptcy for individuals in the US, chapter 7 bankruptcy is the most popular due to its greater ease; most people who enter a chapter 13 bankruptcy do not successfully complete the repayment plan.

However, there are some debts that cannot be discharged by chapter 7 bankruptcy that can be restructured with a chapter 13 plan, some debts that can be discharged in chapter 13 settlements but not in chapter 7, and it is easier to restore your good credit after a chapter 13 filing than a chapter 7. In this article we will discuss all of these situations in which a chapter 13 settlement is favorable.

Rules governing Chapter 13 Bankruptcy under BAPCPA

The 2005 law restructuring bankruptcy in the US, called the Bankruptcy Abuse Prevention and Consumer Protection Act, forces many people into chapter 13 bankruptcy who previously could have chosen to file under chapter 7. In particular, those whose average monthly income is above the median for a household of their size in their state and who do not pass the Bankruptcy Means Test are barred from filing under chapter 7.

People who file for bankruptcy tend to be in the lower half of the income bracket anyway; a study of 11,000 chapter 7 filers before the new law took effect found that only 15% of then-chapter 7 filers would have had to have pass the Means test now, so the changes won't impose chapter 13 bankruptcy on an exceptionally large fraction of filers.

Mortgage and Car Payments

Chapter 7 bankruptcy places restrictions on how you can repay mortgages and car loans that are more severe than those in chapter 13. If you wish to repay your missed payments over time and eventually restore your original mortgage or car payment agreement, you would usually be stuck when filing under chapter 7, but would be able to do so under a chapter 13 filing.

Another case comes up when you are making payments on a car that you wish to keep, but for which the remaining cost you owe is much more than the market value (if the car was purchased more than 2 and a half years before the bankruptcy filing). Under chapter 13 bankruptcy but not chapter 7, you can keep the car by paying its retail value under your chapter 13 plan rather than the full value you owe on the original contract.

Debts Not Dischargeable Under Chapter 7 Bankruptcy

While chapter 7 bankruptcy can immediately relieve you of many debts, it is not a magic cure-all; there are debts which will survive a chapter 7 case. However, some of these debts can be paid off over an extended period of time under chapter 13 bankruptcy. Examples of such debts include:

recent back taxes and unfiled taxes
student loans
court judgments
back alimony and child support
court-imposed fines
debts owed due to a civil judgment for injuries or death caused by drunk driving


You Wish to Repay Your Debts

Many people would be happy to get out from under the shadow of debt by whatever means are possible. However, you may feel that, while it would be great for you to be cleared of this burden, it is not right to wave away your debts with the magic wand of chapter 7 bankruptcy (at least those that are dischargeable under chapter 7); that is, you may feel that this is your obligation and that it is not just to wash away your responsibility along with the debts. For people of such morals who cannot repay their debts without its protection, chapter 13 bankruptcy provides a means for them to satisfy their sense of responsibility while maintaining their ability to support themselves.

The Bottom Line

While the requirements of chapter 13 bankruptcy seem daunting, and indeed, most attempted chapter 13 bankruptcies end in failure, there are things possible under chapter 13 bankruptcy which are not possible under chapter 7. In addition to making it possible to repay debts not dischargeable under chapter 7 and make up mortgages and car payments, chapter 13 bankruptcies facilitate the process of restoring your good credit.

If any of the above considerations apply to you and you feel confident in your ability to complete the repayment plan, you may choose to file under chapter 13 even if you are eligible for a chapter 7 bankruptcy under BAPCPA.