Four times when Chapter 13 may be a better fit for you
If you fit into four categories, Chapter 13 may be better for you.
If you are behind on your debts and are considering bankruptcy, you may have already heard about the benefits of Chapter 7, as it is the type of bankruptcy that individuals file more often. However, you may be less familiar about the benefits of the other type of bankruptcy- Chapter 13. Knowing when this type of bankruptcy can especially be helpful to you is crucial in order to seek the type of bankruptcy protection that would be best for you.
Foreclosure is imminent
Chapter 13 is a type of bankruptcy that requires you to have a regular income. If this is the case and you are struggling with your mortgage, it can be a very helpful solution. As soon as you file, the automatic stay halts the foreclosure process. Once this happens, your mortgage arrearages become part of the payment plan. Under the plan, you make monthly payments towards your back mortgage payments in monthly installments over three to five years. The amount you must pay each month is based on your disposable income, so the payments will be affordable to you.
Under the bankruptcy laws, as long as you make the payment each month, you can remain in your home without fear of your lender restarting foreclosure proceedings. At the end of the payment plan period, you are caught up on your mortgage and free of most other debts.
Although Chapter 7 offers some protection against foreclosure, if the mortgage is not brought current very quickly, the lender may reinstitute foreclosure proceedings. As a result, if you need more time catching up on your mortgage, Chapter 13 is likely a better fit.
You have nonexempt property
Another reason why Chapter 13 is attractive to some is that it allows filers to keep their property. In Chapter 7 bankruptcy, this type of property, which includes second homes, multiple vehicles and certain luxury items, is sold to pay outstanding debts. However, during Chapter 13, there is no liquidation of this type of property. As long as you make your monthly plan payments, Chapter 13 lets you hold on to all of your property.
Some of your debts are non-dischargeable
There are certain types of debts that cannot be discharged in bankruptcy, such as alimony, child support, some taxes and student loans. As a result, Chapter 13 is generally better for those needing time to catch up on the payments for these debts. Although Chapter 13 cannot discharge the debts themselves, it does allow you three to five years to become current on them. During the repayment period, Chapter 13 offers protection from garnishments, lawsuits and other attempts to collect the debt.
You are underwater on a second mortgage
If you are behind on a second mortgage that, combined with your first mortgage, is more than the market value of your home, Chapter 13 is especially beneficial. Under the bankruptcy laws, underwater second mortgages are treated as unsecured debt and are discharged (also called lien stripping). This type of help is not available to those filing Chapter 7. Once relieved of the obligation to make payments on a second mortgage, many filers find it much easier to focus on becoming current on other debts.
An attorney can help
Since the correct type of bankruptcy for you may not be immediately obvious, it is important to have the assistance of an experienced bankruptcy attorney during the decision-making process. An attorney can consider the circumstances that are unique to you and recommend a course of action that will best protect your long-term interests.