Before covering the pros and cons, it could be helpful to understand the core differences between Chapter 7 and Chapter 13 bankruptcy. For example, Chapter 13 bankruptcy can cost 3 times more and take 3 or 5 years vs 4 months.
Understanding Your Options
You'll notice by going through the list of pros and cons that the list is quite extensive. To make it easier, we built the following bankruptcy pros and cons calculator to allow you to compare each option holistically. The calculator does the following:
Estimates Chapter 7 qualification
Estimate Chapter 13 plan payment
Provides Pros and Cons of Chapter 7 and Chapter 13 Bankruptcy
Provides all-in cost estimates
Compare different debt relief options and costs along with pros and cons to those options.
Chapter 7 Bankruptcy Pros and Cons
Filing a Chapter 7 bankruptcy case can get rid of debts and protect your property. However, filing for bankruptcy is not a decision that you should make lightly. Once you file a Chapter 7 petition, you may not be able to get out of bankruptcy if you change your mind. It is known as a liquidation bankruptcy, so it's important to know how a Chapter 7 bankruptcy works and the pros and cons. Also, while some people do consider Chapter 7 vs Chapter 11 bankruptcy, we will not cover it in this article as Chapter 11 often pertains to business bankruptcy, not a personal bankruptcy, which is far more common.
Now that you see the pros and cons, let's review them in more detail.
A no-asset Chapter 7 case is typically completed within four to six months after filing the Chapter 7 petition. That means that much of your unsecured debts may be eliminated in under 180 days.
Pro: Keep Property
Many people who file under Chapter 7 keep all their property, but there is a chance that you could lose property in Chapter 7. See the “cons of Chapter 7” below for more about losing property in Chapter 7.
Pro: Stop Debt Collection Lawsuits
If a creditor sues you, filing Chapter 7 stops the lawsuit. If the debt is eligible for a discharge, the lawsuit cannot resume and you get rid of the debt. For creditors with judgments, Chapter 7 gets rid of judgments if the debts are dischargeable.
Pro: Prevents or Gets Rid of Deficiencies
A deficiency is the amount of money owed to a creditor after a foreclosure or repossession. In other words, you owe more money even though you lost the property. Filing Chapter 7 gets rid of deficiency judgments. Chapter 7 also prevents deficiencies. If you surrender collateral in Chapter 7, the creditor cannot try to collect more money from you if the sale of the property does not pay the debt in full.
Disadvantages of Chapter 7 Bankruptcy:
Con: Potentially Losing Property
Chapter 7 is a liquidation bankruptcy. Any property that is not protected by bankruptcy exemptions is at risk of being sold by the Chapter 7 trustee. The Chapter 7 trustee uses the money from the sale of a debtor’s property to pay the debtor’s unsecured creditors.
Con: Negative Credit Score and Credit Report Impact
Your credit score may be negatively impacted and your credit report will have a public record showing bankruptcy. Chapter 7 remains on the credit report for 10 years. You may want to read Experian's guide on how Chapter 7 may affect your credit score.
Con: Some Debts Not Dischargeable
Some debts are not dischargeable in bankruptcy, including most taxes and student loans. Alimony, child support, restitution, some judgments, and most government debt is not dischargeable in bankruptcy. If you file under Chapter 7, you continue to owe these debts when you complete your bankruptcy case.
Con: Harder to Prevent Foreclosure and Repossession
Because there is not a bankruptcy repayment plan in Chapter 7, you must catch up on mortgage payments and car loan payments quickly to keep your home and car in Chapter 7. Under Chapter 13, you can spread out those payments over three to five years to keep your home and car in bankruptcy.
Con: Income Requirements
Chapter 7 has specific income requirements to qualify for a bankruptcy discharge under this chapter of bankruptcy. The bankruptcy Means Test compares your income to the average income of households in your state. If your income exceeds the median income for your state, you may not qualify for discharge in Chapter 7. However, the Means Test may not apply if the majority of your debts are business debts. Also, you might still qualify for Chapter 7 if your disposable income (income you can use to repay debts) is below a certain amount.
Let's now dig into the Chapter 13 bankruptcy pros and cons.
Chapter 13 Bankruptcy Pros and Cons
You may be considering bankruptcy and wondering what the pros and cons of a Chapter 13 bankruptcy are. Chapter 13 bankruptcy cases are court-administered debt repayment plans. It is a voluntary reorganization. You cannot be forced to file a bankruptcy case under Chapter 13. Your creditors cannot file an involuntary Chapter 13 bankruptcy case.
However, Chapter 13 bankruptcy is not right for every situation. Some individuals might benefit more from a non-bankruptcy form of debt relief. Let’s take a closer look at the pros and cons of Chapter 13. We also discuss several bankruptcy alternatives that might offer a better way for you to get out of debt.
There are many benefits of filing for debt relief under Chapter 13. Some of the reasons people choose to file bankruptcy under Chapter 13 include.
Pros of Chapter 13 Bankruptcy
Pro: Saving Their Home From Foreclosure
A Chapter 13 bankruptcy case can help you save your home from being sold at a foreclosure sale. In a Chapter 13 plan, you can catch up on past due mortgage payments (mortgage arrearage) over several years.
To stop foreclosure without Chapter 13, you would need to catch up on the payments in one lump sum, qualify for a loan modification, or refinance your home mortgage. When you are struggling with debts, those options may not be possible.
With the help of the bankruptcy courts, you can keep your home by filing a Chapter 13 plan. The Chapter 13 plan allows you to reorganize your other debts so that you can afford to resume regular mortgage payments again.
Pro: Getting Rid of a Second Mortgage
You may be able to get rid of the second mortgage in Chapter 13. If your home is worth less than you owe on your first mortgage, you can file a motion to value the second mortgage as zero.
If the court approves your motion, the entire balance of the second mortgage becomes an unsecured debt. When you complete your Chapter 13 case, the second mortgage is wiped out. However, your home cannot be worth even $1 more than you owe on the first mortgage to make this work.
Pro: Getting Rid of Tax Debts
Income tax debts are typically not dischargeable (forgivable) in a bankruptcy case. However, you can spread out those payments over three to five years to help you get rid of old tax debts. Also, if some of the income tax debt is older tax debt and meets various requirements, you might be eligible to get rid of tax debt for less than you owe the government.
Pro: Help With Car Payments
If you are behind on your car payments, Chapter 13 can also help avoid repossessions. Through your Chapter 13 plan, you might be able to lower your car payments if you owe more on your car than it is worth and you have owned your car for at least 910 days before filing for bankruptcy relief. If not, you can at least stretch out the payments on the car loan for another 60 months, which may lower the payments to an affordable payment.
Pro: Help with Domestic Support Payments
Domestic support obligations (DSOs), alimony, and child support in arrear are not dischargeable in bankruptcy. However, you can include back child support and past due alimony payments in your Chapter 13 plan. Instead of facing jail time or other court sanctions, you can catch up on your past-due DSO payments through the bankruptcy case. You must make all future alimony and child support payments on time to remain in Chapter 13.
Pro: Getting Rid of Unsecured Debts
General unsecured debts, such as credit card debts, medical bills, old utility bills, old rent payments, and personal loans can total tens of thousands of dollars. Depending on your financial situation, you may get rid of those debts in Chapter 13 by paying just a small percentage of the debt through the bankruptcy repayment plan.
Pro: Chapter 13 Bankruptcy Can Stop Eviction
One of the less common benefits of a Chapter 13 bankruptcy is that it can stop an eviction. The answer is a bit more nuanced than that, but the gist is that it can help if you are facing eviction.
Cons of Chapter 13 Bankruptcy
Let's cover some of the disadvantages of Chapter 13 bankruptcy.
Con: Negative Credit Score and Credit Report Impact
Furthermore, Chapter 13 (like Chapter 7) is also on your public record that can be accessed via PACER. However, Chapter 13 is on your record for 7 years vs 10 years for a Chapter 7 bankruptcy.
Con: Attorney Fees
The attorneys’ fees are typically higher for a Chapter 13 case. For example, you may pay $1000-$3000 in attorney fees for a Chapter 7 bankruptcy, and you may pay $3000-$5000 in a Chapter 13 bankruptcy.
However, many Chapter 13 bankruptcy attorneys include most, if not all, of their attorneys’ fees in the plan.
Con: Low Payment Flexibility
A Chapter 13 bankruptcy often have low payment flexibility, so if your Chapter 13 payments are too high, you may have limited options. During that time, you cannot incur debt or sell assets without bankruptcy court approval. Furthermore, if your income increases, your Chapter 13 payment may increase. You are required to pay all disposable income into your Chapter 13 plan.
Con: Length of time
You can file a Chapter 13 bankruptcy quickly, but the plan takes a while until you are discharged. You can receive a discharge in a Chapter 13 bankruptcy in 90 days, but a Chapter 13 bankruptcy case often lasts 3 or 5 years. There are exceptions to this, but many plans are quite a while. This is often why some people may consider debt settlement as well to a Chapter 13 bankruptcy.
Are you still interested in Chapter 13 now that you understand some of the most common pros and cons of Chapter 13? If so, explore the Chapter 13 process in more detail with Ascend. Use the bankruptcy calculator below to estimate Chapter 13 plan payment, Chapter 7 qualification, the costs, and the pros and cons.
Pros and Cons of Bankruptcy Chart
You may be looking through the pros and cons of bankruptcy and feel more confused. As such, we want to provide the following chart that will allow you to compare Chapter 7 and Chapter 13 pros and cons. Please note some of the values are estimates.
Are Alternatives to Bankruptcy Available?
After reviewing the pros and cons of Chapter 7 and Chapter 13, you may want to explore alternatives to filing bankruptcy. It is always a good idea to review all your options for debt relief before deciding whether to file bankruptcy. Some common ways other than Chapter 13 that many people use to get out of debt include:
You can negotiate a settlement with each creditor to pay less than you owe in full satisfaction of the debt you owe. However, there are a few potential problems with debt settlement that you don’t have with Chapter 13.
Your creditors are not required to work with you to settle your debts. You must also have a lump sum of cash available to pay the debts as you agree to settlement amounts. Additionally, any debt that is forgiven is included in your taxable income for the year, which could result in a tax liability.
Debt consolidation involves combining your debts into one monthly payment. You can achieve this goal by obtaining a new loan to pay all the debts in full or working with a debt consolidation company.
There are a couple of issues to consider. Most lenders require collateral for a debt consolidation loan. You could risk losing your home or other assets if you cannot afford to repay the consolidation loan.
Debt consolidation companies charge fees for their service. Your creditors are not required to work with the company, so you could have some creditors that you still need to pay each month. Also, debt consolidation companies reduce your payments to creditors by extending the terms of your loans in many cases. This option could increase the total you owe and result in more interest payments.
Debt Payoff Planning
Ascend has a debt planner app that can help you manage your debts and pay them off efficiently and timely. The Savvy Debt Payoff Planner helps you get out of debt at your pace without the bankruptcy court or a debt consolidation company.
Hopefully, the information provided helps you understand the advantages and disadvantages of both Chapter 7 and Chapter 13 bankruptcy. For example, in a Chapter 7 bankruptcy, you could lose certain assets that are outside of the bankruptcy exemptions, but a Chapter 13 bankruptcy can cost much more expensive and take much longer for a bankruptcy discharge.
Take the calculator below to estimate the cost and qualification and compare alternatives.