3 benefits of filing a Chapter 13 bankruptcy instead of Chapter 7

On Behalf of | Jul 1, 2021 | Bankruptcy

Many people think of Chapter 7 or liquidation proceedings when they think about bankruptcy. However, there are multiple different forms of individual filings. Other than Chapter 7, Chapter 13 is arguably the most common.

Chapter 13 filings require a repayment plan before the person filing can get a discharge of their unsecured debts. While Chapter 7 bankruptcy may be the faster route to your discharge, there are many benefits associated with filing for Chapter 13 bankruptcy instead.

Your personal property won’t be at risk

People call chapter 7 proceedings liquidation bankruptcy because the courts can force someone to sell their property. In fact, those who file Chapter 7 sometimes even need to refinance their homes and cash out equity to repay creditors before their discharges.

The more valuable assets you have, the more you could lose with a Chapter 7 filing. You won’t have to liquidate any of your property if you file for Chapter 13 bankruptcy instead. 

You can qualify with higher than average income

The courts limit who can file for chapter 7 bankruptcy. You have to pass a means test that shows that your adjusted income is below the state median for your household size. If your income is higher than average, that might mean you don’t even qualify for Chapter 7 bankruptcy. Chapter 13 has a much higher limit for income, making it accessible to professionals and business owners alike. 

You can feel better about making a good-faith effort at repayment

The repayment plan managed by a court-appointed trustee is a major difference between a Chapter 13 bankruptcy and Chapter 7 filing. Your unsecured creditors receive nothing other than the proceeds of any liquidation sales in a Chapter 7 filing, meaning that they will have to take serious losses.

When you pursue a Chapter 13 filing instead, you will have to make payments to your creditors, likely for three years, before you become eligible for a discharge. Making those payments, while they may not fully pay off your creditors, can help reduce any guilt you feel about not meeting your financial obligations.

Understanding how Chapter 13 bankruptcy works can help you decide what kind of filing will be the best option for you.