While Chapter 7 attracts the majority of personal debtors looking for bankruptcy protection, Chapter 13 offers the opportunity to put together a payment plan, usually for five years, that allows you to pay at least some money to your creditors. Statistics from 2016 show that about 37% of individual debtors chose Chapter 13 over Chapter 7. Here are some of the reasons you and your bankruptcy attorney may opt for a Chapter 13 filing:
In many cases, a debtor whose income is simply too high cannot choose a Chapter 7 bankruptcy. Interestingly, one of the goals of the 2005 revisions of the bankruptcy code was to encourage more debtors to choose Chapter 13. However, the percentage of debtors choosing Chapter 7 before 2005 and recently shows there has been little change.
The way your average monthly median income is determined is by calculating earnings for the past six months. Your bankruptcy attorney will then compare the total with the median figures for the state. Even if you are above the median income level, there’s a chance you can still qualify for Chapter 7 by utilizing the means test. In brief, this mathematical calculation is designed to determine if a debtor has any disposable income after paying bills at the end of the month. If there is sufficient disposable income, the debtor has no choice but to go forward with a Chapter 13 filing.
For some debtors, Chapter 13 can be used to stop the foreclosure of a home or vehicle. If you’re in that situation, your bankruptcy attorney will explain the benefit of the stay that is issued by the bankruptcy court once a filing has been received. The bankruptcy code requires that all creditors immediately stop any attempts to collect a debt once the matter is in bankruptcy court. With your home or car lender blocked from taking actions to seize your property, it’s possible to include any outstanding payments or fees into a long-term payment plan.
While debtors who fall months or more behind on a mortgage or car payments are often unable to come up with the money in a lump sum, it is much easier to pay back what is owed over a five-year period. The Chapter 13 reorganization plan also must include regular monthly mortgage or car loan payments as well.
Stripping a Second Mortgage
It isn’t uncommon for debtors to have at least two mortgages on their home. One action available only in a Chapter 13 reorganization bankruptcy is to strip away a second mortgage. Your bankruptcy attorney can explain that in the aftermath of the housing crisis, the value of many homes dropped precipitously. That left homeowners with a first mortgage greater than the current appraised value of the home. In that case, a second mortgage is totally unsecured. It’s possible then to reclassify the second mortgage to be treated the same as all of your other unsecured debt.
For example, you owe $225,000 on a home that you bought for $300,000 – a $250,000 first mortgage and $50,000 second mortgage. After the housing crash, your value falls to $200,000. That means no portion of the $50,000 second mortgage is secured by equity in the home. Most debtors in a Chapter 13 case pay only a small percentage of their unsecured debts, such as second mortgages that have been stripped.
Many debtors want to protect a relative or friend who agreed to co-sign for a loan or credit card. In a Chapter 7 case, the debtor can be discharged from an unsecured debt that involves a co-signor. But that discharge doesn’t stop the lender from seeking the debt from the co-signor. By choosing a Chapter 13 filing instead, a debtor can include payments on the debt that is guaranteed by the co-signor in the payment plan.
You Want To Pay Some Debt
Some debtors feel uncomfortable with the thought of discharging virtually all debts in a Chapter 7 filing. A Chapter 13 reorganization plan allows the debtor to pay some or all of what is owed to creditors.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.