Simplistic but often true: Chapter 7 deals better with simpler debts, while Chapter 13 with more complicated debts. What ARE the more complicated debts?
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More complicated debts include those that 1) are not discharged (written-off) in bankruptcy, 2) are secured by collateral you need to keep but aren’t current on, or 3) are specific unusual ones handled better in a Chapter 13 payment plan than in a straight Chapter 7 bankruptcy.
Sometime 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 that the better choice.
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Debts Not Discharged in Bankruptcy
If you owe a not-so-large recent income tax debt, or are just a little behind on your support payments, you can file a Chapter 7 case and often be able to take care of the tax or support obligation by arranging for monthly installment or catch-up payments. Using Chapter 13 in that situation would likely be unnecessary.
But if the amount you owe or are behind on is too large, or if the creditor is too aggressive, then Chapter 13 would be better. Why? Because it forces the creditor to be lots more patient. It 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 or two that can’t be discharged in Chapter 7 can still be reasonably handled after the bankruptcy is over, or instead needs the extra power of Chapter 13?
The same way that every person is unique, every person’s financial situation is unique. So you need to talk with someone who will listen to you and understand your goals, and has dealt with many situations similar to your own and can give you sound advice about this.
Secured Debt, Behind on Payments
Similarly, if you want to hang onto your vehicle and/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 will depend on the circumstances. So again you need to talk to the experienced bankruptcy attorney about your goals, and get advice about whether you will likely be able to satisfy a particular creditor fast enough. You need a reliable judgment call because the decision whether to file a Chapter 7 or 13 will affect you for years.
Special Debts Handled Better in Chapter 13
Chapter 13 has some other features which simply are not provided in Chapter 7, much less provided outside bankruptcy.
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. This can save a homeowner tens of thousands of dollars, and greatly reduce the monthly cost of the home. Stripping a second mortgage is only potentially available in Chapter 13, not in Chapter 7.
A vehicle “cram down”—in which the amount you owe on your vehicle is essentially reduced to the value of vehicle—is also potentially available only in Chapter 13, not Chapter 7.
If you owe any co-signed debts, they can be favored 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.
The Limits of a Rule of Thumb
Once again, there’s so 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 people so often have unusual combinations of circumstances. This rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—is simply a sensible starting point for your own thinking, and for your conversation with an experienced bankruptcy attorney.