If I can just file and get rid of all debt in a Chapter 7, why would I consider filing a Chapter 13?

Chapter 13, is entitled “Adjustment of Debts of an Individual With Regular Income.” http://www.doney.net/bkcode/ch13.htm. Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $307,675 and secured debts are less than $922,975. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.

Chapter 13 is very different from Chapter 7 as the debtor makes payments to creditors, through the trustee, based on the debtor's anticipated income over the life of a plan. In this sense, Chapter 13 is like “debt consolidation.” Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. During the course of the plan, the debtor is protected from lawsuits, garnishments, and other creditor actions. The “regular income” can be from any number of sources, and may fluctuate considerably (as is often the case as small business income). The “plan” in a Chapter 13 requires confirmation by the bankruptcy court. It is this plan which sets forth the treatment of the various creditors and the amount that the debtor must pay each month for ultimate distribution to the creditors. Click here to review Chapter 13 Bankruptcy Basics published by the Administrative Office of the U.S. Courts.

The amount of the payments to be made under a Chapter 13 depend on a number of factors: the amount of assets of the debtor, the income and expenses, the amounts and types of debt. Each plan is different and usually requires a careful review and analysis.

If a debtor is not qualified to file a Chapter 7 (too much income relative to expenses, for instance), they might be forced to file a Chapter 13. However, assuming that they have a choice in the matter, the usual reason to file a 13 is that a home can often be saved from foreclosure. A Chapter 13 will ordinarily stop foreclosure proceedings and may permit the debtor to cure delinquent mortgage payments (arrearages) over time. Nevertheless, the debtor must still make all mortgage payments that come due during the chapter 13 plan. If the financial circumstances are such that the debtor will never be able to stay current on the mortgage payments on a going forward basis, then the plan will likely fail as the creditor will ultimately ask the court for “relief from stay” so that it can proceed with foreclosure. There are other reasons to file a Chapter 13. It may be that the circumstances align that they can pay 100 percent of certain tax obligations that would survive a Chapter 7, and pay just their secured creditors for property they want to keep anyway and leave unsecured creditors with very little or nothing in the way of payments.

There has been substantial abuse in the past with serial filings under Chapter 13. Under the Bankruptcy Reform Act, An individual cannot file under Chapter 13 (or any other chapter) if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the automatic stay. Also a person cannot get a Chapter 13 discharge if they got a discharge in another Chapter 13 within two years; or got a discharge in another Chapter 7 within four years. This is a big change under the Bankruptcy Reform Act and limits the utility of filing a Chapter 13.