When To Use Chapter 13 Bankruptcy

Sometimes it makes sense to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy.

However, Chapter 13 bankruptcy may, in some circumstances be the better or only option. Also, some debtors don't have a choice. Depending on their income or past filings, not every debtor is eligible for Chapter 7 bankruptcy. In those cases, a Chapter 13 bancruptcy will by the only relief available.

Below are some reasons you may want to file for Chapter 13:

• You do not qualify under the Means Test. Since 2005 all filers have been required to use a means test to determine if they qualify for Chapter 7 relief or Chapter 13 relief:
  • Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state. See my discussion of the means test for more information about the median income and a helpful flow chart.
  • Your disposable income, after subtracting reasonable and necessary expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. (See the link above more moreinformation). In this case, the court determines you have the means to pay at least a portion of your debt.
• You are behind on your mortgage or car loan. Suppose you have missed car or mortgage payments but now have the ability to timely make those payments. Under Chapter 13, you can propose aplan which allows you to make your regular monthly payments, plus some of your arrearage thrugh the U.S. trustee. Once your plan is approved, your creditor is prohibited from forclosing or repossessing your property if you stay current with your plan payments.

When To Use Chapter 13 Bankruptcy

• You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. Your plan can include a monthly payment program to pay these off over time.
• You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you are permitted to keep only (property that is protected from creditors under state or federal law). If you have non-exempt property the bankruptcy trustee can take it and sell it to use the funds to pay your creditors. While most debtors have sufficient exemptions to retain all of their property, some may have property in excess of the allowable exemptions.

  These debtors may want to file Chapter 13. In Chapter 13 you don't have lose any property. Instead, you repay your debts out of your disposable income over a period of time. If you have nonexempt property that you want to keep, Chapter 13 might be the best option.

• You have a codebtor on a personal debt. Suppose you have debt where another non-filing person is the codebtor. Under Chapter 7, the debt will be discharged as to you, but your codebtor remains liable to pay the obligation. Your creditors can, and usually will, go after your codebtor to collect. Under Chapter 13, the credit will leave your codebtor alone as long as you stay current with the payment.