When it comes to bankruptcy, the popular notion is that filing for Chapter 7 is a better option than filing for Chapter 13 bankruptcy. It is indeed easy to assume this, since Chapter 7 can wipe out most of your debts. On the other hand, chapter 13 would require you to repay some portion of your debt. But this is not always the case.

Depending on your situation, there are times when Chapter 13 may be a much better and viable option. Besides, for some debtors, they may not be eligible for Chapter 7, leaving them with Chapter 13 as the only way out.

What exactly is Chapter 13 bankruptcy?

Chapter 13 of the Bankruptcy Code provides rules for adjustments of a debt(s) an individual may have. Also known as a wage earner’s plan, it lays the groundwork for people with regular income to pay off their entire debt or a portion of it.

Unlike Chapter 7 bankruptcy, where the debtor pays off his or her debts by selling their property, Chapter 13 bankruptcy enables the debtor to keep his or her property and instead pay off debts in installments using a court-approved plan, usually within a period of three to five years.

However, there are some criteria as per Massachusetts law that have to be met for an individual to be able to file for Chapter 13 bankruptcy. They are listed below:

• Businesses are not allowed to file for Chapter 13. You have to be either an individual, or jointly file as a married couple.
• You must not have had discharged any debt in Chapter 13 within the last two years, or the last four years for Chapter 7.
• You must not have any bankruptcy case that, within the last 180 days, was not dismissed.
• You have a certificate to prove that you have undergone a debt counselling program provided by an approved agency at least 180 days before filing for Chapter 13.
• Your debts are not more than $336,900 in unsecured debt, and not more than $1,010,650 in secured debt. Note that these limits are adjusted every three years for inflation.
• For the last four years, you must have filed all state as well as federal income tax returns.
• Your plan must cover all debts that has to be repaid including priority debts like unsecured debts, spousal and child support, etc; secured debts like vehicle loan, mortgages, etc; and other secured debts like tax liens.
• You must have enough regular income to cover your debts. You can even include your spouse’s income.

When Chapter 13 is a better option than Chapter 7

Depending on your issue, Chapter 13 may be a better option for you. Below are some of the issues where, contrary to popular belief, filing for Chapter 13 is a smarter move than filing for Chapter 7.

• Your vehicle loan or mortgage is due
  Only when filing for Chapter 13 can you make up for missed loan payments like vehicle loan and mortgages. So, if you are behind on any of these, Chapter 13 is a better option for you.
• Your personal debt has a codebtor
  If you have a codebtor and you file for Chapter 7, they will be targeted by the creditor as well. So, if you want your codebtor to be off the hook, file for Chapter 13 bankruptcy and make sure you diligently follow your proposed payment plan.
• You have certain debts that Chapter 7 cannot cover
  If you have certain debts like student loans, tax obligations and other debts that Chapter 7 cannot cover, you can file for Chapter 13 to pay off such debts over time.
• You want to keep your property
  If you file for Chapter 7, your non-exempt property will be sold to repay your debts. So, if you want to avoid foreclosure, and still pay off your debt, chapter 13 is a better option.

When you file for Chapter 13 bankruptcy, you have to pay off your debts as per a debt payment plan over the course of three to five years. The payment plan, which is dependent on your unique situation and financial resources, requires you to make monthly payments to your creditor(s).

However, there is a chance that you may face unexpected circumstances that require a huge sum of money. After all, three to five years is a long time, and no matter how much we plan, we are never certain of all the things that could happen to us. You may need serious and expensive medical treatment, you could lose your job, get a divorce, etc. No matter what your experience is, the point is that you may be in a position where you cannot complete your debt payment. In such cases, here are several options for you to consider:

1. Request the Massachusetts court for payment suspension
   If you find yourself in a position where you cannot continue with your monthly debt payment, one of your first options is to ask the Massachusetts court to temporarily suspend your debt payments. However, keep in mind that you will have to provide the court with a good, solid reason as to why you require a suspension. Moreover, the trustee also needs to agree to your payment suspension request. The suspension usually cannot be longer than one to two months.
2. Modify or amend your payment plan
   Another option to consider is making amendments and modifications to your Chapter 13 payment plan. If you experience any serious financial crisis which is likely to have an effect on your finances for a long time, this option may be available to you. Usually, the amount of your monthly payment is reduced, so you will have to propose the suggested changes to the court with the amount you can afford to pay monthly. You will also have to provide clear documentation of why you need this amendment.
3. Consider converting to Chapter 7 bankruptcy
   If you believe that your financial position will not improve any time soon, you may be able to convert to a chapter 7 bankruptcy case. However, you will have to update all your statements and schedules. You will also be provided with a new trustee, and submit solid proof and documentation that you can no longer continue with your Chapter 13 payments because of an unexpected circumstance. Once converted, you will pay off most of your debts. However, priority debts like child support, vehicle loans, mortgages, etc will not be discharged.
4. Consider applying for a hardship discharge
   If you really don’t think that you won’t be able to continue with your Chapter 13 payments, and you don’t have any other option, you can consider applying for a hardship discharge. However, you will have to convince the court that you cannot convert to Chapter 7, cannot afford to make changes to your existing repayment plan, won’t be able to continue paying even with a suspension, etc. Basically, you have to prove to the court that you have run out of all other options. Only then will it be approved. But priority debts are not paid off in this option.
5. Dismiss your bankruptcy case, and then refile later
   Finally, if you cannot make payments despite having considered all the above options, you have one last chance of meeting your goals. You will have to dismiss the case entirely, and refile later when you believe your financial situation has significantly improved, and you can make regular monthly payments under Chapter 13 bankruptcy debt payment plan.