Chapter 13 : The Road Less Filed

Most bankruptcies today are filed under Chapter 7 of the federal Bankruptcy Code. However, If you make too much money to qualify, you may have to file under Chapter 13. Many people are not familiar with Chapter 13 requirements, which differ noticeably from Chapter 7. There are certain advantages and disadvantages to a Chapter 13 filing.

Chapter 13 is what is referred to as a “reorganization” bankruptcy, as opposed to a Chapter 7, which is a “liquidation”. This means that Chapter 13 debtors still have some income and can use it to pay off creditors on a set schedule, as opposed to simply throwing themselves upon the proverbial mercy of the court. If you have too much money to be able to file a Chapter 7, this is your only choice. However, some people do choose to file a Chapter 13, as it does have some benefits that a Chapter 7 filing does not.

Benefits of a Chapter 13 Filing

There are three main advantages to filing a reorganization as opposed to a liquidation bankruptcy. The first one is that a Chapter 13 allows you to catch up on payments on secured loans, like car payments or mortgage payments, while Chapter 7 does not. Because you are permitted to catch up on missed car or house payments under a Chapter 13 bankruptcy, you may be able to stave off repossession of your property.

The second major advantage of Chapter 13 is that if qualifications are met, you may engage in what is called lien-stripping, or removing junior unsecured loans entirely from your home or other real property. Lien stripping is when junior liens can be eliminated entirely from your reorganization plan because they have no value after the primary lien is satisfied; for example, a second mortgage might be stripped if the first mortgage is for more than the house is worth. This may save untold amounts of time and money.

The third major advantage of a Chapter 13 filing is that debts that are not dischargeable in Chapter 7 may be able to be included in your reorganization plan in Chapter 13. Debts like certain tax liens and student loans can be paid down over time - they may not be discharged, but you can pay over time and may only be required to pay in part.

Drawbacks of a Chapter 13 Filing

There are drawbacks to choosing Chapter 13, however, if you have more than one option. Before you are able to file for Chapter 13, you must complete credit counseling from a U.S. Department of Justice-approved agency. Also, a Chapter 13 filing may not wipe out your unsecured debts; if you are deemed to have sufficient income, you may have to pay back a portion of these, unlike in a Chapter 7 filing where they are usually wiped out.

You must also make payments to the bankruptcy trustee for as long as your reorganization lasts; if you lose your job or your situation changes, your plan may be modified, but it is entirely within the jurisdiction of the bankruptcy court as to whether or not to do so. That uncertainty is not there with a Chapter 7 filing; the debts are paid or discharged, and life moves on.

If you need help in navigating a Chapter 13 bankruptcy, or in determining if a Chapter 13 filing is right for you, please do not hesitate to contact the Dowe Law firm, serving Contra Costa, Solano, and Alameda counties.