Chapter 13 Bankruptcy – A Better Solution?

When you think about filing for bankruptcy, you’re typically considering Chapter 7. Grab your debts, drop most of them at the courthouse door and move on with your life – the idea being that a quick resolution to the bill problems will help you get back on your feet financially in short order.

For some people, Chapter 7 is the right way to go. But look deeper and you’ll see a more attractive option to consider.

Chapter 13 bankruptcy involves a repayment plan that lasts for (depending on your financial situation) three or five years. The amount of money you repay is determined by a fairly complex calculation, and your payments are overseen by the bankruptcy court.

If you’ve thought about Chapter 13 it’s likely because you’re looking to stop foreclosure or car repossession and pay the arrears over time. But scratch the surface and you’ll find Chapter 13 to offer far more benefits than a Chapter 7.

Asset Protection In Chapter 13

When you file for Chapter 13 bankruptcy you do not surrender ownership of any of your belongings. This stands in marked contrast to Chapter 7, which protects certain assets and requires you to turn over others to the bankruptcy trustee. If you’ve got a home, car or other assets that can be taken because their value exceeds the applicable exemptions then you may want to consider Chapter 13 instead of Chapter 7.

With Chapter 13, You’re In Control

Under the bankruptcy laws, you’re allowed to dismiss (in other words, withdraw) your Chapter 13 case at any time. Not so with Chapter 7, which can be dismissed only if the court agrees. If your situation changes then you can convert your case from Chapter 13 to Chapter 7 or even walk away from it entirely.

Handling Debt Arrears In Chapter 13

Backed up on your child support or tax obligations? Under Chapter 13 you can repay those arrears over the life of the repayment plan rather than having to worry about them even after a Chapter 7 discharge.

Strip Baby, Strip!

If you’ve got a first mortgage that leaves you without any equity in your home, you can “strip” the second mortgage and wipe out the lien on your property. If you’ve had a car for more than 910 days you can lower the balance on the loan to the fair market value. And even if the car is less than 910 days old you may be able to lower the interest rate on the loan to something more in line with reality as opposed to what a loanshark would charge.

In Case Things Go Sour Again

Let’s say you go through a Chapter 7 bankruptcy and your financial life goes bad again. For example, a large medical expense crops up and it’s not covered by insurance. If you’ve received a Chapter 7 discharge in a case filed within the past 8 years then you’re locked out of another Chapter 7. You may be able to file a Chapter 13 but if you’re unemployed you’re out of luck. Not so if you’ve filed for Chapter 13. After a Chapter 13 case is completed, you may be able to file for Chapter 7 and get a discharge of your debts far more quickly. In that way you can consider a Chapter 7 your ace in the hole – you don’t want to pull it out unless the situation is dire.

If you’re thinking about filing bankruptcy, give careful consideration to Chapter 13. Your future may depend on it.

Jay S. Fleischman is a consumer bankruptcy lawyer who sues creditors and bill collectors for harassment after bankruptcy. When not helping people with bill problems, he works with attorneys to help improve their law firm marketing and management systems.

Image by Holster.