Put aside all the detailed advantages and disadvantages of these 2 options. The core difference is how each uses time in your favor.
The Biggest Difference—Time
We could give you a helpful list of the practical differences between Chapter 7 and 13, and we do that in our other blogs. But let’s focus today on these two options’ completely different treatment of time, and how, depending on your circumstances, one or the other is better for you.
Chapter 7—One Point in Time
Chapter 7 bases just about everything on that moment in time when your case is filed. It looks at your assets and your debts as of that moment. It particularly bores in on your assets as of that moment, generally caring very little about what new assets you acquire into the future. There are limited exceptions—like if you tried to hide assets that you owned before filing, or if you get an inheritance soon after filing. But otherwise Chapter 7 has a steely-eyed fixation on the filing date.
That means that Chapter 7 is usually very fast. In a straightforward case, about three-four months after filing most or all of your debts are discharged (written off), and your case is closed. A fresh financial start in a 100 days, give or take. If speed is important to you, Chapter 7 has that advantage.
Chapter 13—Stretching Out Time in Your Favor
Speed isn’t always in your favor. Chapter 7 is more limited than Chapter 13 in the problems that it can solve. So getting in and out of bankruptcy quickly isn’t so good if you’ve only taken care of some of your debt problems and the others are still sitting on your lap. Chapter 13 buys you time to deal with those other problems.
Chapter 13 looks less at the moment you file the case and more at giving you a span of years to do what you need to do and receive protection from your creditors in the meantime. Here are just a few of the very special ways it does this:
- One kind of particularly dangerous debt—child/spousal support arrearage—can never be discharged in bankruptcy AND can you with extraordinarily aggressiveness (such as suspending your driver’s and occupational/professional licenses) that are not stopped EVEN FOR A MOMENT by a Chapter 7 filing. In contrast, Chapter 13 DOES stop collection of support arrearage, and gives you years to catch up, often under such flexible terms that you can pay some other creditors first (such as to catch up on a home mortgage or vehicle loan).
- Certain other kinds of similarly dangerous debts—recent income taxes, for example—cannot be discharged in bankruptcy if they are not old enough. Collection on taxes IS stopped by a Chapter 7 filing, 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, giving you that much time to pay it, again often allowing you to pay some other creditors ahead of it if necessary. And generally the interest and penalties stop accruing, so that you are not paying for the privilege of paying slowly.
- If you are behind on your home mortgage payments, Chapter 13 gives you years to catch up, perhaps in the meantime allowing you to “strip” a second or third mortgage off your home title altogether.
- Chapter 13 can sometimes allow you to hold off on selling your home until a couple years later, at a time when it would be better for your family and your home’s value may have increased.
Many factors come into play in deciding between Chapter 7 and 13. But a sensible starting point is that Chapter 7 is fast when you want fast, and Chapter 13 is deliberate when that’s what you need. Chapter 7 tends to be the choice that makes sense if all or most of your debts will be discharged, solving 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, and you need the benefit of time and some stronger tools to deal with them.