Debtors who are not eligible for a Chapter 7 bankruptcy may file a Chapter 13 bankruptcy. A Chapter 13 bankruptcy also enables the debtor to things that cannot be done in a Chapter 7 bankruptcy. Many people think of a Chapter 13 bankruptcy as being “the one where you actually have to pay all your debt”, but that is a misunderstanding of how Chapter 13 works.
Whether or not the debtor has to pay any part of their unsecured debt in a Chapter 13 depends on the calculation to determine the debtor’s disposable monthly income. This is a complicated calculation, but the essence is that it is only if a debtor has disposable income does any payment have to be made to unsecured debtors. Many people who do not quite qualify to file Chapter 7 will still not have any disposable income in a Chapter 13, and therefore will not have to pay any money to their unsecured creditors.
A Chapter 13 also has many advantages over a Chapter 7 case. In certain circumstances, even when a debtor would qualify to file Chapter 7, it is to their advantage to file a Chapter 13. Things that can be accomplished in a Chapter 13 but not in a Chapter 7 include:
- Curing late payments on secured loans like mortgages and vehicle loans.
- Reducing the amount owed on a vehicle loan (subject to time restrictions on date of vehicle purchase).
- Discharging debt that has been divided in a divorce.
- Paying off taxes owed without further interest or penalties being charged.
- Having an opportunity to stop making student loan payments during the Chapter 13 case.
- Keeping non-exempt property that would have to be surrendered for the benefit of creditors in a Chapter 7 case.
In some cases, filing a Chapter 13 case may cost less money up front, even though the overall legal fees will be higher, because a portion of the Chapter 13 legal fees can be paid through the Chapter 13 after the case has been filed. With a Chapter 7 case, the full amount of the legal fees must be paid prior to filing.
Some attorneys only file Chapter 7 cases. It is important to have a consultation with an attorney experienced in both Chapter 7 and Chapter 13 cases to make sure that you choose the option that best suits your circumstances.