Why Chapter 13 Bankruptcy May Be Better Than Chapter 7
For over 25 years, I represented debtors, filing over 4,000 Chapter 7 and Chapter 13 bankruptcy cases. Now, as a creditor’s advocate in Texas, I help creditors recover what they are owed from debtors. While my perspective has shifted, I still understand the nuances of bankruptcy and how each chapter affects both debtors and creditors. This article explores why Chapter 13 bankruptcy might be a better—or the only—option for certain debtors.
Understanding Chapter 7 vs. Chapter 13 Bankruptcy
Many debtors assume Chapter 7 bankruptcy is the best choice, but in some cases, Chapter 13 is the more favorable option. Whether due to eligibility restrictions or specific circumstances, here are situations where Chapter 13 bankruptcy can work to a debtor’s advantage:
1. Catching Up on Missed Mortgage or Car Payments
Debtors who have fallen behind on their mortgage or car loans may find Chapter 13 more advantageous. Unlike Chapter 7, which typically results in the liquidation of assets, Chapter 13 allows debtors to make up for missed payments through a structured payment plan and keep their property.
2. Managing Non-Dischargeable Debts
Certain obligations, like:
- Tax debts
- Student loans
- Back child support
…are not dischargeable under Chapter 7. While these debts remain non-dischargeable in Chapter 13, they can be included in the repayment plan, allowing debtors to pay them over time while benefiting from the bankruptcy court’s protection.
3. Protecting Non-Exempt Property
In Chapter 7 bankruptcy, only exempt property is protected under Texas law. Non-exempt assets are sold by the trustee to satisfy creditor claims.
In Chapter 13 bankruptcy, debtors can retain both exempt and non-exempt property while repaying their debts through income-based payments.
4. Shielding Co-Debtors
If a debtor files for Chapter 7, creditors may pursue co-signers or co-debtors for payment. In Chapter 13, co-debtors are granted temporary immunity from collection efforts, provided the debtor adheres to the repayment plan.
5. Maintaining Creditor Payments with Court Protection
Debtors who wish to repay their obligations but need the court’s protection to avoid aggressive collection efforts may find Chapter 13 an ideal solution. This chapter provides structured deadlines and safeguards, ensuring creditors are paid while giving debtors a manageable path forward.
The Importance of Legal Guidance
Bankruptcy laws are complex, and each debtor’s situation is unique. For creditors, understanding the intricacies of both Chapter 7 and Chapter 13 bankruptcy is essential in determining the best strategy to recover owed debts.
