When is a chapter 13 bankruptcy preferable to a chapter 7 bankruptcy?
1) A Chapter 13 can remove a second mortgage from your home. Your attorney must file a motion to value collateral. To qualify, you must show that your home is worth less than the first mortgage at the time of filing. If the value of your home is very close, the lender may object to the motion. In such cases, a bankruptcy judge will decide the outcome.
2) A Chapter 13 can prevent foreclosure by allowing you to bring a first and/or second mortgage current over time (3-5 years). A chapter 13 can also prevent repossessions by bringing your auto loans and other secured debts current.
3) You are able to consolidate all of your debts into one payment based on your disposable income in a 13. Remaining balances left unpaid at the end of your chapter 13 repayment plan are discharged just as in a chapter 7. Most clients pay only a fraction of their entire debt back in a chapter 13.
4) A person who does not qualify for chapter 7 bankruptcy because their income is too high may file for relief under chapter 13 of the bankruptcy code. While a chapter 13 does require the debtor to make payments, the payment amount is based on your income. It is like a best efforts consolidation loan except that your payment is not based on the amount of debt you have. It is based on your income. Low wage earners pay less into a chapter 13 than high wage earners.
5) A person who does not qualify for a chapter 7 because of a recent bankruptcy filing may file under chapter 13 much sooner. Ask a bankruptcy attorney to look-up your previous filing on PACER to determine the date and type of bankruptcy you filed.
6) For debtors who are upside down on their vehicles, a chapter 13 may lower the principle balance on their auto loans so long as the loan was taken out at least 910 days before filing. This is called a cram-down and will lower the principle balance to the value of your vehicle at the time of filing. You will pay the loan through the chapter 13.
6) For debts which are not discharged in a chapter 7, a chapter 13 allows you to pay such debts before other debts based on priority. Further, some debts are discharged in a chapter 13 (e.g. debts arising from torts and/or fraud) that are not discharged in a chapter 7. This is referred to as the chapter 13 super discharge.
7) For debtors with signification non-exempt property, keep in mind that a chapter 13 is not a liquidation. Therefore, you can protect such assets from in a chapter 13. However, your plan must pay your unsecured creditors at least as much in a chapter 13 as they would have received from liquidation in a chapter 7. In most cases, this is not an issue.
Lastly, your future creditors will more than likely view a chapter 13 filing on your credit report much more favorably than a chapter 7. A chapter 13 shows you made an effort to pay back some of your debts.
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