Why choose Chapter 13 over Chapter 7?

Once you learn a little about bankruptcy, it becomes apparent that a Chapter 7 proceeding wipes out all of your debt quickly and economically, but a Chapter 13 case costs more and takes up to 5 years to complete.  A Chapter 7 case is usually opened and closed in less than six months; requires no monthly payments; almost always allows you to keep all your property; and costs only about $1,800.  A Chapter 13 case, however, costs more up front; forces you to make monthly payments; and drags on for at least 3 to 5 years.

Why would anyone choose Chapter 13 over Chapter 7?  Here are several reasons why a Chapter 13 case may be the right choice for you:

1.  Chapter 13 can stop foreclosure and save your house.    If your house is in foreclosure, Chapter 13 provides a remedy called “Cure and Maintain.”  This allows you to cure the deficiency by making up the missed payments over 3-5 years, while maintaining your current monthly mortgage payments,  effectively stopping the foreclosure and reinstating your loan as current again.

2.  Chapter 13 can provide a workable plan to repay taxes.  If you owe the IRS or your state tax authorities and they have levied your  bank accounts, or attached your wages, Chapter 13 will allow you to stop that uncontrolled bleeding and force them to accept payments you can afford.  Once you file, the IRS will often work with you to pay off your tax liability.   A Chapter 7 case can’t help you with non-dischargeable taxes.  You will still owe them after the Chapter 7 case is completed, and the IRS will resume levies and intercepts.  Chapter 13, on the other hand, can solve your tax problems.  When your Chapter 13 plan is completed, your taxes are paid off.

3.  Chapter 13 can relieve you of having to pay a second mortgage.  If you owe more on your first mortgage than the house is worth, and have a second mortgage on top of that, you can “strip” that second mortgage lien from your title, and discharge what you owe for pennies on the dollar. Click here for more on “lien stripping.”

4.  Chapter 13 may be available to you even when you don’t qualify for Chapter 7.  If you don’t qualify for a Chapter 7 bankruptcy because your monthly income exceeds the state average (i.e., you fail the “means test”) but you need relief from your debts, Chapter 13 can still help.

5. Chapter 13 allows you to keep all your property.  If you own personal property or real estate that isn’t exempt in Chapter 7 (like a boat, camper, or vacation cottage), you can file under Chapter 13 and still keep it.  Your plan must pass the “Chapter 7 liquidation test,” meaning that you must pay into your Chapter 13 plan at least as much as your creditors would have gotten in a Chapter 7 liquidation, but for most people this is not difficult.

For more information on Chapter 13 bankruptcy, click here.

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