When is Chapter 13 better than Chapter 7?

This is an important consideration that you should review with a professional. Determining which form of bankruptcy is better for you depends on a careful review of your situation. Call 210-930-7000 to schedule your free Debt Consultation to review ALL your options and to see how bankruptcy might benefit you.

Here are the main reasons to file a Chapter 13 bankruptcy:

1. To Stop Foreclosures, Repossessions or Garnishments – There is a powerful bankruptcy tool, the “automatic stay,” that prohibits debt collection activities at the moment that the bankruptcy case is filed. It goes into effect “automatically” with the filing of the case, which is why it has the name “automatic stay,” and it has the power to stop foreclosures, repossessions and garnishments. In a Chapter 7 bankruptcy, these things are stopped only for the 90 days that the case is open, but these actions can be stopped during the entire period 3 to 5 year of the Chapter 13 bankruptcy.
2. To Get More Time To Catch Up On A Home Loan Or Pay A Vehicle Loan – If you are facing foreclosure, the creditor may have informed you that the only way to avoid foreclosure is to pay a large amount in one lump sum to get current on all your overdue payments. A Chapter 13 bankruptcy plan allows you to save your house from foreclosure while taking up to 60 months to repay those overdue payments. In regard to a vehicle, you may be facing repossession because you’ve missed three payments on the vehicle. A Chapter 13 bankruptcy plan allows you to pay for the vehicle by putting the entire vehicle loan in the bankruptcy plan, and take up to 60 months to pay it off. This allows you to keep the vehicle, while at the same time giving you some breathing room.
3. To Save Property That You Could Not Save In A Chapter 7 Bankruptcy – Most people can save all their property (all their “stuff”) when they go through bankruptcy because there are various exemptions that allow you to protect your property while going through bankruptcy. If I review a person’s situation a determine that they have too much stuff, then I show them what stuff they would lose if they went through a Chapter 7 bankruptcy. I then show them how they can protect that stuff by going through a Chapter 13 bankruptcy. Let’s say the person has $3,000 of stuff that is not protected in a Chapter 7. If that person goes through a Chapter 13 and pays unsecured creditors at least $3,000 over the 3 to 5 plan, then they can keep all their stuff. This is huge benefit, especially when that extra $3,000 of “stuff” is cash!
4. Because You Have Too Much Income – In order to qualify for a Chapter 7 bankruptcy, you have to be below median income. To determine income for this purpose, we get an average of all household income sources for the past six months and compare it to median income figures for Texas. If you are over median income, you most likely will not qualify for a Chapter 7 bankruptcy. Even if you satisfy this test, we look to see if you have disposable income left over after your budget provides payment for living expenses and any debts you are going to keep. If you have at least $100 left over, it may not be enough to pay all of your credit cards, medical bills and personal loans, but it doesn’t matter. The fact of having $100 left over would disqualify you from a Chapter 7 bankruptcy, and it would force you to do a Chapter 13 rather than a Chapter 7.
5. Because The Payments Are Cheaper In A Chapter 13 – In general, if you want to keep your possessions, you must continue to pay for your possessions. So, if you do a Chapter 7 bankruptcy and you want to keep your car, you must continue to pay for the car loan and any other debts secured with the car loan. Let’s suppose you financed your car at your local bank or credit union more than 2 ½ years ago, and that you owe $15,000, but the value of the car is only $11,000. Let’s also assume that you also have a line of credit or credit card at that same bank or credit union with a balance of $8,000. You can go through a Chapter 7 bankruptcy, but you will not get the title to the car until after you have paid in full the $15,000 car loan AND the $8,000 line of credit or credit card. Why the $8,000 line of credit or credit card? Because it is also secured with the title of your car with what is known as a “Cross-Collateral” provision in the security agreement with the car loan. It says something like this: “you are giving this security interest in your car to secure payment for this car loan and any other amounts you now owe or will owe this financial institution.” So, in a Chapter 7 bankruptcy, you would have to pay the $15,000 for the car loan and $8,000 for the other loan, for a total of $23,000 for a car that’s worth only $11,000. In a Chapter 13 case, you would only be required to pay the value of the vehicle, which is $11,000, which would be a $12,000 savings.
6. Because You Made Too Many Credit Card Charges In The Previous 24 Months – As a general rule, anything you do shortly before filing bankruptcy is looked at very carefully. If you make substantial charges on a credit card in the 24 months before filing bankruptcy AND the creditor can show that you incurred that debt at a time that you could not afford to repay that debt, then you will be stuck with that debt after filing bankruptcy. Balance transfers are included in the mix. Many times I see someone who is qualified for a Chapter 7 bankruptcy because their new job pays less then there were making previously. During their period of unemployment, there were forced to use their credit cards to survive until they made the transition to their new situation. Regardless of the reasons that the person had to use the credit cards, the fact remains that the charges were fairly recent and they were incurred at a time when the person could not afford to repay the debt. The options are to wait until about 24 months have gone by since all that credit card activity, or go forward with a Chapter 13 proceeding now. If you wait the 24 months, your income or situation may change in a way that may prevent you from filing a Chapter 7 at that point, and then a Chapter 13 would be your only bankruptcy option. In the meantime, you have to handle your debts on your own. If you wait until your income goes up, your Chapter 13 payment will be higher than it would be if you started your case at time when your income is lower, because the payment is determined in part by whatever is left over after all your living expenses have been paid.
7. Because It Takes Less Money Up-Front To File A Chapter 13 Bankruptcy – The U.S. Bankruptcy Code forces attorneys to collect all fees before the case is filed. Chapter 13 works differently. In a Chapter 13, you make monthly payments to the Chapter 13 trustee, and the trustee uses those funds to pay the balance of the attorneys fees. Sometimes clients simply cannot come up with the funds to file a Chapter 7 bankruptcy, and we can file a Chapter 13 for as little as $125 per month. That makes a Chapter 13 bankruptcy a very affordable alternative.
   

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