What benefits does Chapter 13 offer?
Although Chapter 7 is more popular, Chapter 13 bankruptcy has many advantage not found anywhere else.
If you are struggling with a multitude of debts, as an individual, you have a choice between Chapter 7 and Chapter 13 bankruptcy in most cases. You may have heard that Chapter 7 offers a quick discharge of your debts and are thus more inclined to seek this type of bankruptcy protection. However, if you have a steady income or are facing repossession of your car or foreclosure of your house, you may want to consider Chapter 13 instead.
One of the barriers to filing Chapter 7 is the means test. Under the test, if you have disposable income above a certain level, you are ineligible to file Chapter 7. Additionally, Chapter 7 is not ideal for those with significant amounts of nonexempt property, as such property is sold to pay debts during this type of bankruptcy. Chapter 13 bankruptcy, on the other hand, is designed for those with a regular income who wish to keep all of their property.
During Chapter 13, all your debts are put into a repayment plan. Each month, you make a payment towards your debts. The amount that you must pay each month is determined by how much disposable income you have, so enough of your income is left over to pay for necessary expenses. Once you have finished making payments under the plan over three to five years, you receive a discharge of any remaining debt.
It is a widely believed fallacy that all debts must be repaid under the plan. In fact, the bankruptcy rules only require you to repay your creditors as much as they would have received in Chapter 7. As a result, you do not have to repay most of your unsecured debt (i.e. credit cards or medical bills), in all but rare cases, since this type of debt is discharged without payment in Chapter 7.
Advantages of Chapter 13
Unlike Chapter 7, no exempt property is sold during Chapter 13. As a result, filers with exempt property such as multiple vehicles, second homes, cash and other assets can keep what they had before they filed bankruptcy, as long as they continue making payments under the payment plan.
Also, Chapter 13 offers better protection against repossession of collateral and foreclosure than Chapter 7. Under the payment plan, secured debts such as your mortgage or car loans become part of the plan, which gives you three to five years to become current on your loans. As long as you make each monthly payment, the bank or financing company cannot take your property. Conversely, in Chapter 7, unless you are able to stay current on your secured debts, there is little protection against losing secured property.
Chapter 13 is also useful for homeowners with an underwater second mortgage or home equity line of credit. Chapter 13 treats these debts as unsecured debts, so it discharges the mortgage note and strips the lien off the property. As a result, the homeowner leaves bankruptcy free of this debt and without fear of foreclosure at a future date.
Additionally, if you owe back taxes, but are unable to work out a payment plan with the IRS, Chapter 13 allows you to pay off the debt over three to five years.
If you are considering bankruptcy, the right type for you is based on the type of debt you owe, your income and assets (or lack thereof), and other factors. An experienced bankruptcy attorney can advise you of the best course of action, given your unique situation.
Keywords: Chapter 13 bankruptcy, foreclosure