Choosing Between Filing Chapter 7 and 13–Easy or Not?

Chapter 7 and 13 are very different debt-fighting tools. But that doesn’t necessarily mean it’s obvious which is right for you.


The Not Always So Easy Choice

Once it is clear that you need bankruptcy relief, picking the right Chapter to file can be simple. Your circumstances may all point towards one option or the other. But sometimes it can be a very delicate choice, with advantages and disadvantages that have to be carefully weighed.

And sometimes what at first seems to have been an obvious choice is not once all of the facts of your case are put on the table. Appearances can be deceiving. Your situation can turn out to have a twist or two that turns your case towards the Chapter you weren’t expecting. 

The unexpected twist is usually either a surprising advantage to filing under the Chapter you had not intended to file, or a surprising disadvantage to filing under the Chapter you had intended to file.

The First Impression IS Often Right

To be clear, when my clients first come in to see me, many have a good idea whether they want to file a Chapter 7 or a 13.  There is lots of information available about this, including on this website. So lots of my clients come in having done some homework. Or at least they’ve heard something about the two Chapters and have an impression which makes sense to them. And much of the time, their initial impression ends up being the right choice. 

But it Can Also be Wrong

Initial notions about what kind of bankruptcy you should file are often wrong because of advantages and disadvantages you had no idea about which end up being game-changers.

The simple fact is that bankruptcy law can be maddeningly complicated. Although the main differences between Chapter 7 and Chapter 13 can be summarized in a few sentences, there are in fact dozens of more subtle but often crucial differences. Many of them do not matter in most situations, but sometimes one or two of those differences can swing the decision strongly in a new direction. Without a thorough review of your case by an experienced bankruptcy attorney, you CAN end up filing under the wrong Chapter, and ending up paying the consequences for many years.

An Illustration

Let’s say you have a home you’ve been struggling to hold onto for the last year or two, but by now have pretty much decided it wasn’t worth doing so any more. You’re seriously behind on both the first and the second mortgages. Like so many other people, the home is worth a lot less than you owe. In fact, let’s say you owe on the first mortgage a little more than what the home is worth, plus another $75,000 on the second mortgage, so the home is “under water” by that amount. Although for the last couple of years you’ve been hoping that the market value will start heading back up, but it’s just held steady. You and your family would definitely like to stay there, buy you absolutely can’t pay both mortgages. Besides it makes little economic sense to keep struggling to hang onto property worth $75,000 less than what you owe. So you’ve decided it’s time to give up on the home, and just file a Chapter 7 bankruptcy.

But then you meet with your bankruptcy attorney and find out some surprising good news. Because your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. You no longer have to make the monthly payments on it, making keeping your home all of a sudden hundreds of dollars cheaper each month.  In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you can keep your home usually by paying very little—and sometimes nothing—on that $75,000 second mortgage. At the end of your case, whatever amount is left unpaid on that second mortgages would be “discharged”—legally written-off—so you own the home without that mortgage. You are debt-free, other than your first mortgage. 

This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. The ability to keep your home by significantly lowering its monthly cost to you and bringing the debt against it much closer to its value could well swing your choice towards filing Chapter 13, contrary to your initial intention.

Meet with Your Attorney with an Open Mind

This is just one example of countless ways that the Chapter you initially thought was the right one might not be. So be sure to keep an open mind about your options when you first consult with your attorney. Do tell him or her your goals, and say why you think one Chapter sounds better to you than the other. In the end, after laying out your story and hearing the attorney’s advice, it is ultimately your choice. But do yourself a favor and be flexible, because you might possibly get better news than you expected when you first walked in.