More Complicated Debts under Chapter 7 and Chapter 13

Chapter 7 often is the better choice if you only have simpler debts, Chapter 13 is better with more complicated debts.

What Are the More Complicated Debts?

These debts tend to include those that

1) are not discharged (written-off) in bankruptcy,

2) are secured by collateral you want to keep but are behind on payments, or

3) are special ones simply handled better in a Chapter 13 “adjustment of debts” payment plan than under Chapter 7 “straight bankruptcy.”

Sometimes Chapter 7 gives you enough overall help that it’s the better choice even if you do have one or two of these more complicated debts. But often the extra leverage that Chapter 13 provides with these debts makes it the better choice, especially if you have more of these more complicated debts.

1) Debts Not Discharged in Bankruptcy

If you owe an income tax debt from a recent tax year, or fell a little behind on your support payments, those debts are among the kinds what would not be discharged in a Chapter 7 case. However, you may be able to file a Chapter 7 case and resolve the tax or support obligation by making monthly installment or catch-up payments directly with the creditor. Using Chapter 13 in this kind of situation might be unnecessary.

But if the amount you owe on debts that can’t be discharged or you are behind on is too large, or if the creditor(s) is (are) too aggressive, then Chapter 13 would likely be better. Why? Because it forces the creditor to give you more time to pay, and protects you, your income, and your assets in the meantime. Chapter 13 generally gives you up to five years to pay off or catch up on these kinds of debts.

So how can you tell whether a debt that can’t be discharged under Chapter 7 can be dealt with reasonably through payments to the creditor after the bankruptcy is over? When do you instead need the extra power of Chapter 13?

To answer this you need legal advice. Every person’s financial situation is unique. So you need to talk with an experienced bankruptcy attorney to get sound advice about this.

2) Secured Debt, Behind on Payments

Similarly, if you want to hang onto your vehicle or home but you’re not current on the loan, Chapter 7 may do enough for you so you can quickly catch up and keep the collateral.

But how much time the creditor will give you to catch up depends on the creditor and on the circumstances. So here again you need to talk to the experienced bankruptcy attorney to get advice about whether you would likely be able to satisfy a particular creditor fast enough if you filed a Chapter 7 case.

Getting reliable information and counsel about these matters is crucial because the decision about whether to file a Chapter 7 vs. 13 will affect you for years.

3) Special Debts Handled Better under Chapter 13

Chapter 13 has some other features for dealing with certain kinds of debts, features which are simply not available under Chapter 7. If one or more of these special features apply to you they can make Chapter 13 your best choice.

For example, under certain circumstances you can “strip” your second mortgage from your home’s title, so that you pay little or nothing on that second mortgage. If you qualify, this could save you tens of thousands of dollars, greatly reducing both the monthly and long-term cost of your home. This feature is potentially available only under Chapter 13.

A vehicle “cramdown”—in which the amount you pay on your vehicle is reduced by being based on its value and not on what you owe—is also available only in Chapter 13.

If you owe a co-signed debt, it can be favored over most of your other debts under Chapter 13 while your co-signer is protected. In contrast, in a Chapter 7 case the creditor would likely be able to pursue your co-signer because there isn’t this special protection.

These are just some examples of the special debts that Chapter 13 gives you special help with, which may induce you towards that option.

It’s a Delicate Choice

There is much more to deciding between Chapter 7 and 13 than looking at what kind of debts you have and whether those debts are “simple” or “complicated.” There are many other factors, and all kinds of combinations of circumstances. Use this rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—simply as a starting point for you to think about and to take up with your bankruptcy attorney.