Seven (7) Reasons People File Chapter 13
1. To Stop Foreclosures, Repossessions, and Garnishments: The minute you file bankruptcy, your creditors have to stop all collection efforts including attempts to foreclose on your house or to repossess your car. Is that cool or what? Only bankruptcy law can do that. In Chapter 7, these things are only stopped for a few months. In Chapter 13, these actions can be stopped for the entire duration of the Chapter 13 case, which can be as long as 5 years.
2. To Give Yourself More Time To Catch Up On A House or Vehicle Loan: Not only does bankruptcy stop foreclosure and repossession, it gives you more time to catch up on overdue payments. Let’s say you were $9,000 behind on your mortgage payment. By this time, the creditor is probably refusing to take your money, and is likely to have started foreclosure. Chapter 13 allows you to repay the amount you are behind (called arrears) in installment payments through the Chapter 13 trustee. For example, if you are $9,000 behind on your mortgage, you could propose to repay that $9,000 without interest by making 57 monthly payments of $158.00 each. These payments are sent to the Chapter 13 trustee, who distributes the money to your mortgage company. Upon completion of your Chapter 13 plan, assuming you kept your ongoing payments current, your mortgage loan would be current and up-to-date.
3. To Save Property You Could Not Save By Filing Bankruptcy Under Chapter 7: Filing bankruptcy does not mean you will lose all your property. In fact, most people who file bankruptcy don’t lose anything. Why? Because the state where you live has exemption laws to protect you. Exemption laws vary from state to state, but are basically lists of things you are allowed to keep and still file bankruptcy. However, some people have too much stuff. So much so that if they file a Chapter 7 bankruptcy case, they will lose some of it. What can they do? The answer may be file under Chapter 13 instead. In Chapter 13, you are given an opportunity to pay out the value of the extra stuff, that is the value above what is covered by exemptions, and to do so over the life of the Chapter 13 plan, which is usually between 3 and 5 years. Let’s say you have $5,000 in the value of property above and beyond available exemptions, and your Chapter 13 plan was going to run for 5 years. You would simply pay the extra $5,000 to the Court, in monthly installments for 5 years. This comes out to less than $100 per month and in return, you get to keep your stuff.
4. Because You Have Too Much Income: Sometimes, a client may simply have too much income to qualify for a Chapter 7 bankruptcy case. This seems odd doesn’t it? Not enough income to pay the bills but too much income to file bankruptcy. What sometimes happens is that people get in so much debt or lose income for long enough that there is not enough income to pay all the bills. Bankruptcy gets rid of certain amounts of debt and because of this, it takes less income to pay the remaining debts and basic monthly expenses. However, if there is income left over above what is needed to pay these remaining debts and basic monthly expenses then the law says, you can’t file Chapter 7. This is called the “disposable income” test. You can still file Chapter 13, however you have to pay the court the extra income, but only for 36 months. That’s okay because perhaps for the first time in a long time you can actually pay your bills.
5. To Get Rid Of Debts Which Are Non-Dischargeable In Chapter 7: Under the law, some debts cannot be eliminated by filing under Chapter 7. Some of these debts can only be eliminated by filing Chapter 13. Examples are certain tax debts, debt involving fraud or embezzlement, certain government fines and penalties (such as moving violations or parking tickets), or debts resulting from intentional injury to another person or property. For example, if you owe $15,000 in income taxes that are four years old, but you never filed the tax return, those taxes are not dischargeable in Chapter 7, but may be in Chapter 13. This expanded list of debts dischargeable in Chapter 13 is called the “super discharge” of Chapter 13.
6. Because The Payments Are Cheaper In Chapter 13 Than Chapter 7: Sometimes when everything is tallied up, it is cheaper each month to file Chapter 13. For instance, let’s say you owe $15,000 on a car only worth $10,000. In Chapter 7, you would have to continue paying on the full $15,000 debt, however, in Chapter 13, you only have to pay the value of the car, which is $10,000. (This assumes the vehicle was purchased more than 2 1/2 years ago.) This saves $5,000 and likely, would lower your monthly payment for the car. Say you have a second mortgage for $30,000 on your house, but there is no value in the house above the payoff of the first mortgage to secure it. It is possible in Chapter 13 to “strip off” this mortgage. In Chapter 7, it is not. Stripping off this mortgage in Chapter 13 would eliminate the second mortgage payment. You can see that in certain circumstances filing Chapter 13 may save more money than Chapter 7.
7. Because It Takes Less Money Up Front To File Chapter 13: When you file Chapter 7, your attorney must get paid all the fees up-front before they file your case. Otherwise, the attorney wipes out his or her own debt. You see, bankruptcy gets rid of debt and this can include unpaid attorney fees. Chapter 13 works a little differently. In Chapter 13, you make payments into the court to a Chapter 13 trustee. If your attorney chooses, they can take less money up front from you and collect the rest of the attorney fees from the Chapter 13 trustee, who pays your attorney out of your Chapter 13 payments. Sometimes, clients simply cannot come up with the funds to file Chapter 7. In this case, Chapter 13 can be an affordable alternative.
Disclaimer: The above is an oversimplification of the law. The law is complex and each situation is different. If you need to file bankruptcy or think you might, your best bet is to see what’s right for you. Call for a FREE Debt Consultation. Call toll free 800-429-HELP(4357) .
