These are each different chapters (as in a book) in the Bankruptcy Code. When possible, Chapter 7 is ALWAYS preferable. It’s quicker, cheaper, easier, and much more common than Chapter 13. The only time it’s not possible is for someone with a very high income (the Code wants a partial repayment plan – Chapter 13 – in these cases), or where there is an ongoing business with significant assets, such as a store with shelves of inventory or equipment. It only takes 3 months from the date of filing to the Order of Discharge, closing the case. Most unsecured debts (or even secured debts that are no longer useful, such as a mortgage on a house that is not worth nearly the amount owed on it, and is returned to the lender) are just plain gone, once and for all. Credit is generally re-built quite nicely within 2 years (instead of 2 year after a 5 year Chapter 13 plan is completed, which adds up to 7 years!).
Creditors do just fine, they get tax write-offs or other governmental breaks. In fact, many clients wonder “why won’t they work with me?” It’s because, unlike a person, where something is better than nothing, due to complicated tax and other provisions, institutional lenders actually come out better with nothing, rather than something. All those pesky and harassing phone calls are really just an attempt to get you to do something, and that’s to file Chapter 7. Creditors do get their way: eventually suing, seizing assets, or garnishing wages, until the Chapter 7 is actually filed.
Chapter 13 can work sometimes, but should be a last resort. It involves a 3 to 5 year repayment plan. The reason only 20% or so of these cases are successful, is that it’s hard for anyone to predict that they will be able to make the same monthly payment for 5 years straight, without any change in income, expenses, or other unexpected events. When that happens, the case can simply be dismissed by the court, and you’re back where you started.
Most clients really “want” to pay their bills. They “want” to do the right thing. It’s just not possible while at the same time taking care of themselves or their family, or other “everyday” obligations. The thing is to do the most right thing. It would be nice if we could all pay all our everyday expenses, our bills, and, for example, solve world hunger. But we must set priorities. Even if you can pay some bills, now or in the future, Chapter 13 is a court ordered plan, not your choice. Chapter 7 explicitly states that nothing in that chapter shall prevent you from paying back a bill, if you are able to at some point in time.
My advice, then, to clients, is to let me help find some way, if possible, to make it a Chapter 7. Only if all else fails might a Chapter 13 be advisable
