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  • Writer's picturePeter Bricks

Chapter 7 and 13 Differences: Which Bankruptcy Chapter Should You Choose?

Updated: Feb 8, 2023

While debtors obviously need to first examine the advantage of bankruptcy and then decide if they should even file bankruptcy or not, bankruptcy solutions cannot accurately be made without understanding and comparing the difference between Chapter 7 and Chapter 13 bankruptcy. This is because a bankruptcy is very different depending under which chapter the debtor files.

There are four primary reasons a debtor would choose to file chapter 13 bankruptcy rather than chapter 7: (1) The debtor is ineligible to file Chapter 7 due to a Chapter 7 filing and discharge in the previous eight years (2) The debtors Chapter 7 filing would have a presumption of abuse under the Means Test and the debtor would therefore likely be denied a Chapter 7 discharge (3) The debtor has some assets with significant equity that he/she wishes to retain rather than forfeit to the debtors Chapter 7 trustee, because the debtor does not have enough exemptions to retain it (4) The debtor wishes to retain secured collateral (typically a house or a car) over the long-term and needs to devise a chapter 13 plan to get caught up on the arrears.

Although there are certainly exceptions, the debtor to whom none of those four reasons apply, would typically file a Chapter 7 rather than Chapter 13. The reason the debtor in this scenario is likely to file a chapter 7 rather than a Chapter 13 is because this debtor could file chapter 7 without losing any property it wants to either creditors or the trustee and presumably has the inability to repay its unsecured creditors anyway on the basis of the means test results. After all, the primary reason debtors choose Chapter 13 bankruptcy over Chapter 7 is because the debtor wants to retain its collateral that it would otherwise lose AND has the ability to repay its creditors over time.

It is important to note that a debtor can convert a Chapter 13 to a Chapter 7 as well as from a Chapter 7 to a Chapter 13. However, whereas a debtor who filed under Chapter 13 is free to voluntarily dismiss his/her case, the debtor who filed or converted to Chapter 7 does not enjoy that luxury. Therefore, if the debtor files Chapter 7 and then later realizes the debtors Chapter 7 trustee has discovered assets to liquidate, the debtor does not have a mulligan to dismiss the case and keep the asset. The debtor can keep the asset, but it requires a conversion to Chapter 13, which requires the ability to repay creditors.

There is even a scenario where the debtor will file a Chapter 7 bankruptcy and stay in it to receive a Chapter 7 discharge and then turn around and file a new Chapter 13 case. This kind of scenario is referred to as a Chapter 20 bankruptcy, and is utilized by debtors who wish to discharge their unsecured debts and then repay the debts that were not discharged in the chapter 7, which are usually student loans, taxes, mortgages and car notes.

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