Chapter 7 vs. Chapter 13 and the Time Element
Chapter 7 is quick. It’s usually best when it discharges most of your debts. Chapter 13 gives you time to address debts Chapter 7 doesn’t.
A Big Difference—Time
There are many practical differences between Chapter 7 and 13. Today we focus on how these two options provide very different advantages and disadvantages when it comes to time.
A Chapter 7 case is usually very fast. Most of the time within about four months after filing, the bankruptcy court discharges (writes off) your debts. In a straightforward case all or most of your debts are discharged, you lose no assets, and your case is closed. Chapter 7 has the advantage of speed.
Chapter 7 fixates on the moment in time when you file your case. It looks at your assets and your debts as of that point in time. It focuses in on your financial circumstances as of then. It cares very little about what new assets or debts you acquire after that, or how your circumstances may change. If you have any debts that are not discharged—a home mortgage or child/spousal support, for example-Chapter 7 provides no ongoing help.
Speed isn’t always in your favor. Chapter 13 has tools for solving more debt problems than Chapter 7. Getting out of bankruptcy fast isn’t that important if it doesn’t resolve some of your more serious debt problems. Chapter 13 buys you time, gives you stronger tools, and protects you while you deal with those other problems.
Chapter 13 looks less at the moment you file the case and more at empowering you for the following 3 to 5 years. Here’s a small sampling of how it can do this.
Bankruptcy never discharges one dangerous kind of debt—child and spousal support. These creditors—your ex-spouse and support enforcement agencies—are legally armed with extraordinarily aggressiveness. For example, in most states they can require your driver’s and occupational/professional licenses to be suspended if you don’t pay your support arrearage. Chapter 7 does not stop these dangerous collection methods at all, not even briefly. In contrast, Chapter 13 can stop collection of support arrearage, and gives you years to catch up. You may even have flexible enough payment terms so that you can pay some other urgent debts first, such as to catch up on a home mortgage or vehicle loan.
Bankruptcy does not discharge certain other kinds of similarly dangerous debts—recent income taxes, for example. Chapter 7 does stop the collection of undischarged income taxes briefly. But the speed of Chapter 7 is a disadvantage here because its protection ends as soon as the case ends. In contrast, Chapter 13’s protection usually lasts the full three-to-five-years that the case is active. So you have that much time to pay it. Usually interest and penalties on the taxes stop accruing as well.
If you are behind on your home mortgage payments, Chapter 13 gives you years to catch up. Sometimes in the meantime you can “strip” a second mortgage from your home.
Conclusion for Now
Many factors come into play in deciding between Chapter 7 and 13. But one good starting point is this consideration of speed. Chapter 7 is fast when you want fast. Chapter 13 buys you time when you need time.
Chapter 7 tends to make sense if all or most of your debts will be discharged—legally written off. If so, that probably solves all or virtually all of your debt problems.
Chapter 13 instead tends to be the better choice if a Chapter 7 would leave you with continued debt problems. In that case you often need the benefit of time and some stronger tools to deal with those special debts.