When Is Chapter 13 Better Than Chapter 7 Bankruptcy?

When most people think about bankruptcy, they probably think of chapter 7. It's the best known type of bankruptcy for good reason: Chapter 7 allows you to discharge nearly all of your debts, and it's the simplest type of bankruptcy to file. However, that doesn't mean that chapter 7 bankruptcy is necessarily the best choice for you. There are some situations when chapter 13 bankruptcy may be preferable, even though it's a repayment plan instead of a total debt discharge. Perhaps the most notable of these situations occurs when you want to keep all of your property. Read on to learn why chapter 13 may be the right choice!

The Exemption Rules in Chapter 7

While chapter 7 bankruptcy laws do allow you to keep some property, the amount that you can keep is strictly regulated by an exemption list. Every state has different monetary limits for these exemptions. A common list of exemptions includes:

  • Homestead: This exemption can be applied towards equity in your home
  • Vehicle: This exemption can be applied towards equity in your vehicle
  • Wildcard: This exemption can be applied towards any type of personal possessions

As long as your equity does not exceed the allowable exemption, you may keep the property in a chapter 7 bankruptcy. All other property will be liquidated for debt repayment.

When The Exemptions Aren't Enough

There are two main situations when the chapter 7 exemptions just won't work.

  • Multiple Properties and Vehicles: The chapter 7 exemptions discussed above apply only to one home and one vehicle. This leaves people who hold multiple vehicles or properties in a bad position. Any extra vehicles or properties can be retained in a chapter 13 bankruptcy, as long as you agree to a repayment plan for them.
  • Insufficient Exemption Amounts: Sometimes the problem is not multiple vehicles or properties but exemption amounts. When a chapter 7 exemption isn't enough to cover the equity and allow you to keep the property, it is possible to add the wildcard exemption to the home or vehicle exemption. However, sometimes the amount may still fall short of the actual equity. In this case, you'd lose the home or vehicle to liquidation. Chapter 13 allows you to keep property and vehicles, regardless of equity, as long as you agree to pay any money still owed in the future.

If you are considering bankruptcy, it is important that you visit a bankruptcy law firm like Morrison & Murff to discuss exactly what the best way to proceed is. Chapter 13 might just be the right answer if the information discussed above rings true for you!