For some people, the bankruptcy code and rules may dictate that you simply do not qualify for Chapter 7, in which case the alternative is to file Chapter 13 “wage earner’s plan”. However, there are reasons why someone may actually choose to file a Chapter 13 rather than Chapter 7, even when they have the option of filing for the more common “straight discharge” Chapter 7 bankruptcy.
Possible circumstances when you must file Chapter 13 (i.e., do not qualify for Chapter 7):
- Your household income exceeds the applicable median income for the state of Minnesota and you do not have enough other certain expenses to reduce your disposable income in order to qualify for Chapter 7. If your income is too high, you will need to file Chapter 13 instead of Chapter 7. This calculation is determined by the “Means Test”.
- Regardless of your household’s income level, you still have disposable income every month after payment of all your monthly living expenses. In Chapter 7, you cannot have significant disposable income or your case could be dismissed or converted to Chapter 13.
- You filed a previous Chapter 7 within the last 8 years so you do not qualify for another Chapter 7 at this time. Chapter 7 can only be filed once every 8 years. Note: a previous discharge in any chapter of bankruptcy will prevent a discharge in subsequent bankruptcy filed within 8 years, meaning that if you file a Chapter 13 within 8 years after a prior Chapter 7, the new Chapter 13 plan must propose a 100% repayment to creditors (i.e., no discharge is allowed in less than every 8 years). Other bankruptcy protections and tools, such as the automatic stay and ability to repay mortgage arrears to fend off foreclosure, are still available in a subsequent Chapter 13 filed within 8 years after a prior Chapter 7 bankruptcy.
When you may choose to file Chapter 13 bankruptcy over Chapter 7:
- You need to repay mortgage arrears and/or default payments on your car loan in order to prevent foreclosure or repossession of the collateral. In Chapter 13 bankruptcy, you can repay home mortgage arrears over 3 to 5 years in the Chapter 13 plan.
- You have assets which would be non-exempt in a Chapter 7 filing and would either face surrendering or paying to keep if you filed Chapter 7. In Chapter 13, you can “pay to keep” any non-exempt assets over 3 to 5 years of a Chapter 13 plan.
- You want to see that your creditors receive some money despite the bankruptcy and even if it means they still won’t get paid in full. Most Chapter 13 bankruptcy plans provide for the proportionate repayment of unsecured creditors anywhere from pennies on the dollar to 100%.
- You have non-dischargeable debts that you want the flexibility to repay over five years with low or no interest.
Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Call for a free bankruptcy consultation to understand your options in Chapter 13 bankruptcy.