Site Loader

You may have experienced a financial hardship and are now considering to declare bankruptcy. You realize that there are pros and cons of both bankruptcy chapters, so the purpose of this article is to provide the pros and cons of Chapter 7 and Chapter 13 bankruptcy and provide access to a calculator that allows you to estimate qualification, compare pros and cons and estimate payments.

Pros and Cons of Bankruptcy Calculator

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 hollistically. The calculator does the following:

  1. Estimates Chapter 7 qualification
  2. Estimate Chapter 13 plan payment
  3. Provides Pros and Cons of Chapter 7 and Chapter 13 Bankruptcy
  4. Provides all in cost estimates
  5. Compare different debt relief options and costs along with pros and cons to those options.

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.

Now that you see the pros and cons, let’s review them in more detail.

Advantages of Chapter 7 Bankruptcy:

Pro: Less Expensive Than Chapter 13

The fees and costs of filing Chapter 7 are typically much less compared to filing under Chapter 13.

Pro: Speed of Chapter 7 discharge

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, the 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.

Downsides 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 a bankruptcy. The Chapter 7 remains on the credit report for 10 years. You may want to read Experian’s guide on how a 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.

Should I File A Chapter 7 Bankruptcy Case?

Deciding whether to file Chapter 7 can be a complicated matter. You must analyze your income, expenses, debts, and assets very carefully to weigh the risks of filing Chapter 7. Depending on your situation, there could be additional pros and cons of Chapter 7 bankruptcy to consider.

You may be considering bankruptcy and wondering what the pros and cons of a Chapter 13 bankruptcy. 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 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 a 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.

Cons of Chapter 13 Bankruptcy

Con: Negative Credit Score and Credit Report Impact

You may be wondering how a Chapter 13 bankruptcy would affect your credit score and credit report. It may depend on your beginning credit score, but you may lose an estimate 100 – 200 points.

Furthermore, a Chapter 13 (like a Chapter 7) is also on your public record that can be accessed via PACER. However, the 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 ofen has 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

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.

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:

Debt Settlement 

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 

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. 

Should I file 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 our Chapter 13 calculator to estimate your Chapter 13 plan payment.

If you want more information or need additional help, contact Ascend at 833-272-3631 to speak with one of our representatives.

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

14 Replies to “Pro and Cons of Bankruptcy: Chapter 7 and 13”

  1. My cousin has been having a lot of problems with his financials because he was laid off from his job and it has been really hard for him to pay the bills. Getting some help from a professional could be really useful and allow him to get rid of his debts and be in a better situation. I’ll be sure to tell him about how the unsecured creditors can be paid from the sale of the debtor’s property.

  2. Thanks for your tips about how Chapter 13 bankruptcy can allow people to keep their home while helping with a lot of payments and the second mortgage becomes an unsecured debt. My cousin has been having a really hard time with his money and financials because he has lost a lot of hours and his wife has lost her job. He would really like to talk to a professional about what he can do and if he needs to file for bankruptcy so that it can be a lot safer and he can be in more control of the situation.

  3. I like how you mentioned that one of the benefits of filing a chapter 7 is that it’s cheaper compared to filing a chapter 13. My brother is thinking of looking for an attorney because he’s considering filing bankruptcy since his divorce that was finalized last month took a financial toll on him. It seems like a good idea for my brother to think about hiring a reputable professional to help him with his bankruptcy if he decides to file.

  4. It really stood out to me when you explained that one of the advantages of chapter 13 bankruptcy is that it can prevent you from having to sell your home in a foreclosure sale. Is it important to show that you have the means to earn the money you need to pay off debt when you are contemplating bankruptcy? It seems like it would be important to be able to prove that you will actually be able to earn the money you need to pay off your debtors.

  5. My dad’s business hasn’t been performing these past few months, which is why he’s considering to file for bankruptcy. Thank you for elaborating here that filing for chapter 7 can help get rid of the debts and protect my dad’s other properties. I also never knew that non-asset chapter 7 could be completed within four to six months of filing.

  6. My friend is having financial difficulties because she lost her source of income thanks to this pandemic. What you said about how a Chapter 7 bankruptcy can make her settle most of her debts is a surprise to me! I’ll recommend this to my friend so she’d consider talking to a bankruptcy attorney for help.

  7. It’s good to know from this article that a person will be able to protect their owned property if they were to file for bankruptcy. My friend doesn’t want to lose the house she has under her name, but she also has to deal with tons of credit card debt. It might be better to consult a lawyer and see what can be the best solution for her problems.

Leave a Reply

Your email address will not be published. Required fields are marked *