Chapter 7 “straight bankruptcy” is quick and often gives you what you need. But in many situations, Chapter 13 gives you SO much more.
The last blog post showed how a simple Chapter 13 case works. That example illustrated one of the special advantages you get with Chapter 13: if you have a debt which can’t be discharged (legally written off) in a regular Chapter 7 case—such as a recent IRS income tax debt or back child support—these kinds of special debts can be conveniently paid over time through a Chapter 13 payment plan. The crucial advantage here is that throughout the 3-to-5-year plan such creditors can’t take any collection action against you or your assets.
That’s just the first major way that Chapter 13 buys time and protection that Chapter 7 simply cannot provide. Here are some of the other main advantages of Chapter 13:
1. You can keep your possessions that are not protected by property “exemptions,” preventing a Chapter 7 trustee from taking them from you. Thus you retain much more control over the process of saving your assets, avoiding the unknowns of negotiating payment terms with a Chapter 7 trustee in order to keep your non-exempt possessions. Also, in a Chapter 13 case, you have 3 to 5 years to pay to protect such possessions, instead of the few months that Chapter 7 trustees generally allow.
2. Similarly, if you fell behind in payments on your home’s first mortgage, you have the length of your plan—the same 3 to 5 years–to catch up. That’s in contrast to the few months of payments that a mortgage lender would generally allow if you negotiated directly with it after filing a Chapter 7 case.
3. You may be able to “strip” a second (or third) mortgage from your home’s title, and avoid paying all or most of that mortgage. This can happen if the value of your home is less than the balance of your first mortgage. Mortgage “stripping” may save you hundreds of dollars per month and potentially many tens of thousands of dollars over time. This is completely unavailable in a Chapter 7 case.
4. You may be eligible for “cramdown” of your vehicle loan. If you purchased and financed your vehicle more than two and a half years before filing your Chapter 13 case, and the vehicle is worth less than the balance on the loan, your monthly payments and the total amount you pay for your vehicle can be significantly reduced. This could enable you to keep a car or truck that you couldn’t otherwise. In contrast, in a Chapter 7 straight bankruptcy case you are usually almost always stuck with the monthly payment and loan balance dictated by the vehicle loan contract.
5. In that same situation, if you are behind on the vehicle loan payments you don’t have to catch up those back payments. In a Chapter 7 case, almost always you must quickly pay off any arrearage if you want to keep the vehicle.
6. If you owe an ex-spouse non-support obligations, you can discharge (write-off) them under Chapter 13—not under Chapter 7. Non-support obligations include requirements in a divorce decree to pay off a joint marital debt or to pay the ex-spouse in return for getting more of the marital property. Discharging such debts can make a huge difference, often making Chapter 13 well worthwhile.
7. If you have any student loans, under Chapter 13 you could likely delay paying on them for three years or more. That can be especially helpful if you have some other debts that are essential to pay off during your case (like child support arrearage or recent income taxes). Also, if you have a worsening medical condition, you may be better situated to qualify for a “hardship discharge” of your student loans if you wait until later in your Chapter 13 case.
People often assume they need and want a regular Chapter 7 bankruptcy, and it’s often exactly what they do need. But the above short list gives you some idea of the benefits of Chapter 13 that may make it a much better option. That’s one of the reasons you should talk with an experienced bankruptcy attorney, and do so with an open mind. That’s because sometimes Chapter 13 can give you a huge unexpected advantage, or a series of smaller advantages, which may swing your decision in that direction.