When it comes to filing bankruptcy, the vast majority of people assume a Chapter 7 is the best option; however, there are many reasons why filing a Chapter 13 is the better option and sometimes the only option.
- You need to stop a foreclosure, respossession or garnishment. When you file bankruptcy your creditors must immediately stop any collection efforts–foreclosures, garnishments, respossessions, civil suits, and harrassing phone calls. This also applies to a Chapter 7 bankrutpcy, but it is only a temporary fix to stop a foreclosure or reposssession unless you can get caught up on the payments quickly. In a Chapter 13, you can repay any missed payments on your mortgage and/or car payments over time and possibly at a lower interest rate than the original contract rate. As long as your Chapter 13 plan proposes to pay these missed payments back, your creditors cannot take any action against you or your property.
- You have two mortgages on your home and the balance of your first mortgage is greater than the fair market value of your home. If your second mortgage is wholly unsecured–the fair market value is less than the balance of your first mortgage–then you can strip that second mortgage in a Chapter 13. That second mortgage would become an unsecured creditor and receive the same percentage as all your other unsecured creditors, usually less than 100%. And, once you complete your plan–in three to five years–you will no longer have a second mortgage!
- You are not eligible to file a Chapter 7, but need to avail yourself of bankruptcy protection. If you filed a Chapter 7 in the past eight years you are not eligible for a Chapter 7 discharge. You are also not eligible for a Chapter 7 if you are above the median income for your state. Check this site for your state’s median income based on family size.
- You have a tax obligation, student loan, or other debt that cannot be discharged in a Chapter 7. You can include these debts in a Chapter 13 plan and pay them back over time, usually with little to no interest.
- You have non-exempt property you want to keep. When you file a Chapter 7 bankruptcy the trustee can take your property, sell it, and use the proceeds to pay your creditors unless the property is exempt according to your state’s exemptions laws. Exemption laws allow you to protect certain property from liquidation in a Chapter 7. A Chapter 13 allows you to keep property that would otherwise be unexempt in a Chapter 7.
- You have a co-debtor on a personal loan. If you file a Chapter 7 bankruptcy, your co-debtor will still be on the hook — and your creditor will undoubtedly go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone, as long as you keep up with your bankruptcy plan payments.
If you are struggling with debt, but aren’t sure whether a Chapter 7 or Chapter 13 is the best option for you, we’d be happy to speak with you and give you legal advice. Email at email@example.com or call 804-794-8070.