Although filing bankruptcy under Chapter 13 requires re-payment of all or part of the debtor’s debts, Chapter 13 offers many benefits over debt liquidation under Chapter 7.
Chapter 13 offers a chance to retain non-exempt property by paying its value to creditors through the plan payments over 3-5 years. In Chapter 7, however, the non-exempt property has to be turned over to the trustee for liquidation and distribution to creditors, unless the debtor is able to buy it back from the trustee by paying the value of the non-exempt asset (most trustees will allow the debtor to make monthly payments for up to a year at no interest).
A Chapter 13 debtor can also “strip down” or “cram down” certain under-secured claims, i.e., retain property securing the debt (collateral) by paying off only its value through the plan. Claims that are completely unsecured can be eliminated or “stripped off” in Chapter 13. See Treatment of Secured Creditors in Chapter 13. Neither the strip down nor strip off is available in Chapter 7. In Chapter 7, the debtor can only keep property securing the debt by reaffirming the debt (which typically results in payment of the total debt) or redeeming the property by paying off its value in one lump sum payment.
The debtor’s rights under Chapter 13 to modify secured claims, cure, or waive defaults and reverse an acceleration permit the debtor to prevent an immediate foreclosure or repossession, extend the time for payments, reduce the amount of the payments, and re-structure their secured debts. In Chapter 7, these remedies are not available. Instead, if the debtor wants to modify any debt, creditors must agree to the terms of the reaffirmation. See Reaffirmation Agreements.
Chapter 13 debtors are allowed to pay unsecured priority claims, such as non-dischargeable domestic support obligations and certain taxes, in full over the life of the Chapter 13 plan, in preference to other unsecured creditors. Chapter 13 debtors may be able to pay other debts that are non-dischargeable in Chapter 13, such as student loans, in full under the plan in preference to other unsecured claims. See Classification of Unsecured Claims. These remedies are no available in Chapter 7.
Chapter 13 also offers the benefit of a co-debtor stay. See Codebtor Stay. In Chapter 7, the automatic stay protects only the debtor. Creditors are free to go after co-debtors.
Chapter 13 debtors can receive a discharge of certain debts that are non-dischargeable in Chapter 7, such as divorce decree debts, civil fines and penalties, debts incurred to pay non-dischargeable federal, state or local taxes, debts that could not be discharged in a previous bankruptcy, welfare repayment obligations, debts for willful and malicious injury to property.