When Chapter 13 is a Better Option than Chapter 7

Updated: Oct 22, 2021

Chapter 13 may not be your first choice for a bankruptcy, and many people wrongly assume that the monthly chapter 13 plan payments is wasted money. While it’s true that unsecured creditors such as credit cards usually receive some distribution in a chapter 13 plan, in most chapter 13s only a small portion of dischargeable debts is actually paid back. There are often circumstances where chapter 13 provides other forms of bankruptcy relief in addition to a discharge of debt. In fact, chapter 13 offers many options that chapter 7 does not, including the ability to get a defaulted mortgage or auto loan out of default and back on track, or cram down an auto loan that is underwater (i.e., stripping the second mortgage), repay taxes and other priority debts, stop interest from accruing on credit cards, protect a co-debtor/cosigner from collection on a joint debt, and more.


Factors when Chapter 13 may be better for you than chapter 7:

  1. You are facing a home foreclosure and need to stop the sheriff’s sale.

  2. Even if foreclosure is not pending, you need time to repay mortgage arrears over 3 to 5 years through a chapter 13 plan. This also applies to homeowners association (HOA) defaults.

  3. Your home is underwater based on your first mortgage and you want to strip a second or third mortgage from the home, i.e., the second mortgage is discharged like an unsecured credit card. This is a huge benefit to chapter 13 over chapter 7.

  4. You want to get rid of a home or condo that you have abandoned and stopped paying on, but the mortgagee bank will not foreclose.

  5. You are behind on your auto loan and need time to catch up on the loan payments.

  6. Cramdown a car loan when you owe more on your auto loan than your vehicle is worth and have had the car auto for at least 910 days. This is called a “cramdown”.

  7. You owe state and/or federal taxes and need more time to repay the taxes—up to 5 years in a chapter 13 plan—than the taxing authority will give you now. Also, it’s possible to have some tax, penalties and interest discharged in bankruptcy even if there are tax liens.

  8. You have priority debts that are not dischargeable in chapter 7 and that you want to take 5 years to repay in chapter 13. Priority debts include many taxes, child support arrears and other domestic support obligations,

As an ARAG legal insurance member attorney, Lynn Wartchow assists clients with ARAG legal insurance in filing chapter 13 bankruptcy cases in Minnesota. If you are considering filing bankruptcy and want to know what a chapter 13 plan would look like for you, Lynn offers free consultations and evaluations including how much you can expect to pay into a chapter 13 plan and what debts are resolved for that amount.

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For the 2019 debt limits effective April 1, 219, see here: The 2019 Chapter 13 Debt Limits effective April 1, 2019 Effective April 1, 2016 and valid for all of 2017 and 2018, the debt limits for filin