There are certain cases where you might want to file a chapter 13 bankruptcy rather than the more common chapter 7. Usually this is because you have valuable assets that might be at risk of liquidation in a chapter 7. So this begs the question; Can you choose?
Usually, the answer is yes, but it depends on whether you have the requisite income to make payments to the chapter 13 plan, and your plan must also ensure that your creditors get at least as much as they would get in a chapter 7.
First, Your Income
Obviously, to get into a chapter 13 bankruptcy you need to be able to contribute money each month towards the repayment plan. The amount of the monthly payment is based on the amount of disposable income you have available after all of your monthly expenses.
However, your plan also needs to meet certain requirements. For example, it must account for the repayment of 100% of priority debts such as unpaid student loan debt, past tax debt and unpaid family support obligations. It must also cover any unpaid past due mortgage if you want to stop a foreclosure and keep your home.
So in order to be able to get a chapter 13 discharge and protect all of your non-exempt property, you need to have sufficient income to meet those requirements.
Second, The "Best Interests of Creditors" Test
There is a law under chapter 13 of the bankruptcy code that requires all creditors involved to receive at least as much money in a chapter 13 case that they would otherwise get if you filed a chapter 7.
For example, imagine in a chapter 7 case you would need to sell off an expensive boat, your only non-exempt asset. Imagine that boat is worth one hundred thousand dollars, and you owe fifty thousand against it. The bankruptcy trustee would sell the boat, repay the fifty thousand dollars to the secured creditor and disburse the remaining fifty thousand dollars amongst the other creditors.
If you chose to file a chapter 13 instead so that you could keep the boat, your plan would need to account for that fifty thousand dollars. Over a sixty month plan, that adds up to about $830 per month. In addition to other monthly payments and the requirement that priority debts be paid, you may not have enough money to make the payment. In a case like that, the judge may order you to file a chapter 7 instead and sell the boat. Is this a bad thing? Sure, but if you're in real financial trouble, maybe it's time to part with that $100 thousand dollar boat and get yourself out of debt.
Bottom Line
In the great majority of cases, if you qualify for a chapter 7 and you don't have a great deal of non-exempt assets, it's the better way to go. On the other hand, if your home is at risk of foreclosure, a chapter 13 is an effective way to save it, assuming you have the income to make it work.
Want to Learn More?
If you want to learn more about both types of bankruptcy and which is best, see the following resources:
Bankruptcy Options: Chapter 7 or Chapter 13?
Nolo's Book: Chapter 13 Bankruptcy
