First and foremost, what is the most basic difference between a chapter 7 and a chapter 13? The most basic difference is that a chapter 13 is a payment plan that lasts between 36-60 months, and a chapter 7 is not a payment plan. When you file a chapter 13, you or your attorney (if you have an attorney) also must file a proposed payment plan, but when you file a chapter 7, you do not file a payment plan.
So why might a chapter 13 be better than a chapter 7?
The most common reason is because you want to keep your house or car and are behind, so in a chapter 13 you can make up for missed payments on your home mortgage and your car payments. Your plan can propose to pay the missed mortgage payments over a payment plan. You cannot do that in a chapter 7 case, since there is no payment plan, you would stay in arrears.
Another reason is that a chapter 13, unlike a chapter 7, allows you to keep all your property if your property happens to be over what is known as the "exemption" limit. For example, if you have $50,000.00 in a bank account and want to file bankruptcy because you have $200,000.00 in debt, you would be able to keep the funds in a chaper 13 so long as you propose a payment plan to pay that amount in a payment plan.
You can also file chapter 13 more often than chapter 7. Under chapter 7 you can only receive a discharge every 8 years. Under chapter 13, it is generally 2 years from the moment of discharge.
Another reason is that a chapter 13 has what is known as a co debtor stay. If you have co debtors, usually in a chapter 13, creditors cannot go after a co debtor to collect a debt that was part of the bankruptcy. However, in a chapter 7, creditors can usually go after co debtors as soon as you file chapter 7.
Attorney fees to file chapter 7 case can be too high to come up with prior to filing, and there may be an urgency to file but not enough funds, in this scenario, you can file a chapter 13 and pay a small upfront attorney fee, and the balance of the attorney fees in the chapter 13 payment plan, albeit the attorney fees are higher, they would be more manegeable and you can afford to file right away. This is usually for real emergencies where there is no other alternative such as family or friends to pay the fee for you for a chapter 7.
There are other reasons as well that filing a chapter 13 can be better for you than a chapter 7. You may be able to lower you car payments by paying a lower monthly amount and maybe even lowering the balance through a provision known as cram down, but you cannot do this in a chapter 7.
At the end of the day, there are also many reasons filing a chapter 7 can be better than a chapter 13 as well. This list does not mean that chapter 13 is better than chapter 7, not at all. These are just some of the benefits that exist in a chapter 13 that do not exist in a chapter 7. Usually, if you are low income, are current on your mortgage and car payments, then a chapter 7 might be better for you. All cases are different, and it is your attorneys duty to advise you what is best for you. If you are in the Houston area, contact the Rashid Law Firm for a free consultation with a bankruptcy attorney today. We are here to help.