Each chapter of the Bankruptcy Code has advantages and disadvantages, and either Chapter 7 or Chapter 13 can be the best choice for resolving unmanageable debt.
We’ll get down to the details, but Chapter 13 allows people with regular income to eliminate their unsecured debt in payments over three to five years under a court approved plan. Disposable income is determined after allowances for reasonable living expenses, so people pay what they can afford.
All dischargeable debt is eliminated when plan payments are completed. Still, a Chapter 13 case inevitably takes longer, costs more, and is more complicated than a typical case under Chapter 7.
So what are the ten benefits of Chapter 13 bankruptcy? Here are ten ways that Chapter 13 can be the best choice for managing past due debt:
1. Save A Home From Foreclosure.
Not only will a Chapter 13 filing stop a foreclosure sale, it will also provide a chance to bring past due payments current over three to five years.
At the end of the plan, monthly payments will continue as though no payments had been missed. Of course, all mortgage payments that become due during the Chapter 13 plan must be made on time.
2. Eliminate A Second Mortgage.
If the value of a residence is less than the outstanding first mortgage, Chapter 13 can be used to eliminate the second mortgage. The debt will only be paid in the same percentage that unsecured debts will be paid under the plan.
The balance of the second mortgage will be discharged upon the completion of payments under the plan. Why? Because the Bankruptcy Code always treats secured debts as unsecured if there is no value in the collateral.
3. Save A Vehicle From Repossession.
A Chapter 13 filing stops repossessions, just like it stops foreclosures. So, a Chapter 13 filing will prevent repossession of a vehicle while past due car payments are brought current over the term of the plan.
Unlike mortgage payments, car payments become part of the Chapter 13 plan payment. If the vehicle is worth less than the loan balance, the loan can be reduced to the value of the vehicle, and the balance is treated as unsecured debt.
4. Protect A Co-Signer.
Chapter 13 has a special provision that protects family or friends that co-signed on a guarantee of consumer debt, which is debt incurred primarily for a personal, family, or household purpose.
Unless the bankruptcy court authorizes otherwise, creditors are prohibited from enforcing a guarantee against a co-signer. And as long as plan payments are made when due, there is no reason for the court to allow collection from a co-signer.
5. Pay Tax Debt Over Time.
Tax debts are typically not discharged under Chapter 7, and the tax agencies will pursue collection of non-dischargeable tax debt after a Chapter 7 discharge is entered.
Chapter 13 allows for the payment of tax debt over three to five years, and generally prohibits the assessment of additional penalties and interest on the amount of the tax.
6. Be Protected If Chapter 7 Isn’t Available.
Not everyone is eligible to file Chapter 7, sometimes due to excess income or where a Chapter 7 filing is considered to be a substantial abuse of the bankruptcy law.
With very limited exceptions, so long as total unsecured debts are less than $383,175, and non-contingent, liquidated, secured debts of less than $1,149,52, an individual can file Chapter 13 if there is a regular source of payment from which to make payments under a plan.
Even if a Chapter 7 can’t be filed, protection under Chapter 13 is almost always available.
7. Minimize Credit Damage.
Any bankruptcy filing will result in a hit to the filer’s credit score, and a blot on a retail credit report. A Chapter 7 filing is the most damaging, as it will be reported for 10 years after the bankruptcy filing.
A Chapter 13 bankruptcy has less impact, as it reflects an effort to repay what can be repaid. Still, a Chapter 13 filing will be reported on a credit report for 7 years after filing.
8. Keep Non-Exempt Property.
If property is not exempt under federal or state law, the trustee is obligated to recover its value for the benefit of creditors.
In a Chapter 13 case, there is the option to make payments under the plan that are equal to the value of non-exempt property, and protect that property from the claims of the trustee.
Creditors still receive the same value that they would have received under Chapter 7. For example, in the case of a singe person filing in Washington, our state law exemptions will protect one car with equity of not more than $3,250.
If a single person had a second car with equity of $2,000, it would exceed the exemption and not be protected. Under Chapter 13, as long as plan payments totaled at least $2,000, the car could be retained, although it was not exempt.
9. Keep Your Options Open.
A Chapter 13 filing, like most Chapter 7 filings, is purely voluntary. Once filed, unlike a Chapter 7 case, you can almost always dismiss a Chapter 13 upon your request.
That could be the right move if there is a change in circumstances, such as a new good job, an unexpected inheritance, or just a desire to resolve debts without the further involvement of the Bankruptcy Court.
10. Get Back Your Driver’s License.
In many states, a driver’s license will be revoked if the driver has unpaid parking tickets, or was at fault in a collision and failed to compensate the other party for damages.
The Department of Motor Vehicles will reinstate a driver’s license upon confirmation of a plan under Chapter 13, and sometimes just upon filing.