Should I File a Chapter 7 or a Chapter 13 Bankruptcy?

by Brett Weiss, Esq.

August 16, 2013

Decide between Chapter 7 and Chapter 13 bankruptcy

Your choice of bankruptcy protection determines the relief you get. Choose wisely.

While some of my clients know what bankruptcy chapter they should file under, most look to me to advise them whether to file for Chapter 7 or Chapter 13 (or Chapter 11 or Chapter 12.

What do I look at in deciding which chapter to recommend?

My “default” setting is Chapter 7. This is the least expensive, fastest and simplest chapter of the Bankruptcy Code. Unless there is a significant reason to file under a different chapter, I will normally recommend that the client file for Chapter 7.

Sometimes, however, the better choice is Chapter 13 bankruptcy.

Why Consider Chapter 7 Bankruptcy?

Depending on the type of debt you have, Chapter 7 bankruptcy may be the right solution for you. Look to the type of debt you have to decide.

Generally, there are three kinds of debt: priority, secured and general unsecured.

Priority debt consists of recent tax debt and domestic support obligations such as alimony and child support. Priority debt is not dischargeable in a Chapter 7. Unless it’s paid in full during the case, you still owe it after you get a discharge.

Most secured debt, that is, debt where you pledge something as collateral, such as mortgages and car loans, are changed from “recourse debt” to “non-recourse debt.” What does this legalese mean? It means that if the lender could sue you for a deficiency or shortfall after a foreclosure or repossession if the sale of the collateral doesn’t bring in enough to pay the debt in full, the bankruptcy discharge stops them from going after you. All they can go after is the collateral, and if it doesn’t bring in enough to pay the debt in full, tough. You’re off the hook. This means that you can walk away from the house or car if you want to. If you don’t want to, just keep the payment current and you’ll be fine.

Upon the entry of a discharge, most general unsecured debt–credit cards, medical debt, personal loans, old taxes, tax penalties, foreclosure and repossession deficiencies, unpaid rent, unpaid HOA and condo fees, unpaid utility bills, etc. (but not student loans)–are wiped out. You don’t need to pay these debts at all.

A typical Chapter 7 lasts about 4 months from filing to discharge.

Why Consider Chapter 13 Bankruptcy?

Why would you want to file a Chapter 13? Several main reasons:

  1. You aren’t eligible for a Chapter 7. You fail the means test, or have too much disposable income to qualify for a Chapter 7. Or you might have filed a Chapter 7 case in which you received a discharge within the last eight years. None of these are problems in a Chapter 13
  2. You are behind on your mortgage and need time to catch up. A Chapter 13 gives you up to five years to spread these payments out to bring the mortgage current, without interest.
  3. You owe more on the first mortgage on your home than it’s worth, and have a second or third mortgage. A Chapter 13 lets you “strip off,” or wipe out, wholly unsecured second and third mortgages.
  4. You’re behind on your tax or domestic support payments and need time to catch up. A Chapter 13 gives you up to five years to spread these payments out to bring them current.
  5. You owe a domestic support property distribution and want to discharge it. A Chapter 13 “super discharge” allows you to do this.

In these circumstances, I would normally advise my clients to consider a Chapter 13.

This decision is not always easy or straightforward. It requires a detailed analysis of your assets, debt, income and expenses, and an in-depth knowledge of the Bankruptcy Code. An experienced bankruptcy attorney is the best person to advise you.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

Last modified: August 24, 2013