When Chapter 7 Bankruptcy Is Better than Chapter 13

Most people choose Chapter 7, if they have a choice. Here are some reasons why.

Most people who file for bankruptcy choose Chapter 7 because it's fast, effective, easy to file, and doesn't require payments over time.

A typical Chapter 7 case is opened and closed within three to six months, and the person filing emerges debt-free except for a mortgage, car payments, and certain types of debts that survive bankruptcy, such as student loans, recent taxes, and back child support.

Although you can lose property in Chapter 7, most filers don't. Bankruptcy lets you keep most necessities -- if you have little to begin with, chances are good you'll be able to keep most items (unless you pledged the item as collateral when you bought it).

However, not everyone is eligible to use Chapter 7. If your income is sufficient, after subtracting what you'll spend on certain allowed expenses and monthly payments for child support, tax debts, secured debts (such as a mortgage or car loan), and a few other types of debts, to fund a Chapter 13 repayment plan, you won't be allowed to file for Chapter 7.

Probably the main reason most people prefer Chapter 7 is that it doesn't require you to repay any portion of your debts, as Chapter 13 does. And if you use Chapter 13, you must complete the entire three- to five-year repayment plan in order to have your remaining debts discharged (unless the court lets you off the hook early, for hardship reasons). The majority of those who file for Chapter 13 are unable to complete their plans.

If you choose to convert from Chapter 13 to Chapter 7 (and you are eligible to file under Chapter 7), all of the money you paid into your plan for dischargeable debts will have been for naught. If you handle your debts outside of bankruptcy, your debts will be reduced by the amount you repaid during your plan.

Despite this major potential drawback, there are some good reasons why people who are eligible for both types of bankruptcy choose to use Chapter 13.