Why file Chapter 13 Bankruptcy (a payment plan) instead of Chapter 7 Bankruptcy (where you pay your creditors nothing)?
Sometimes you have to opt for chapter 13 bankruptcy because you aren’t eligible for chapter 7. For example, if your debt’s primarily consumer debt and you make “too much” money. Or you have necessary property valued in excess of exemption limits, and it would have to be surrendered under chapter 7 bankruptcy.
But chapter 13 bankruptcy has unique mechanisms unavailable under chapter 7. Sometimes you might want to file chapter 13, even if you otherwise qualify for chapter 7 bankruptcy.
One common benefit to chapter 13 bankruptcy is that you can modify a vehicle loan by reducing the loan’s principal to the vehicle’s current value. This principal “cram down” option is available for loans taken 910+ days ago. If you’re behind on car loan payments, you can restructure the loan under chapter 13 rather than suffer repossession.
Another ability under chapter 13 bankruptcy is the means to “cure mortgage arrears,” meaning catch up on late mortgage payments. You would have to resume payment of ongoing dues, but the past due balance can be paid without penalty over a period of up to 60 months.
It’s less common now, but “lien stripping” was a popular feature of chapter 13 bankruptcy in the wake of the last real estate market crash. If a home’s value depreciates below the payoff on the first mortgage, then the second mortgage or equity line can be “stripped” from the title if you complete a chapter 13 plan.
Certain debts that would survive chapter 7 bankruptcy (like recent taxes) may be subject to onerous interest rates and be too difficult to manage. Chapter 13 bankruptcy provides for court approved payments with reduced penalties and interest on income tax debt.
For the consumer or small-business person, chapter 13 is part of the arsenal of options that a qualified bankruptcy attorney has at his disposal to resolve debt problems. To contact me, you don’t need to know in advance which bankruptcy chapter is best for you, or even what the difference is between them. It’s my job to explain the benefits, advise you of your options and make a clear recommendation as to which bankruptcy chapter would serve you best. The different chapters are basically different tactics to achieve the same end result: freedom from debt and a fresh start.