What are the advantages of chapter 13 bankruptcy?
Chapter 13 can do things that chapter 7 bankruptcy cannot. Those additional powers come with added complexity, making chapter 13 a prudent choice only when one of its advantages provides a real benefit for the person who files bankruptcy.
The highest profile advantage of chapter 13 bankruptcy is ability cure defaults and sometimes modify repayment terms for secured loans. A secured loan is an loan where the lender has an interest in collateral, including mortgages and car loans.
- A chapter 13 plan can propose to repay missed mortgage payments and cure the default, preventing foreclosure. Unlike other mortgage relief, catching up payments in chapter 13 doesn't ordinarily require lender consent.
- Pay for and keep a car, regardless of whether the payments are current at the time of filing or not. Chapter 13 also has the prospect of reducing the monthly car payment. Typically, a payment can be stretched out over the course of the plan; often, the interest rate can be adjusted; and sometimes, the principal due can be reduced to the value of the car.
- Remove a second mortgage lien when the amount owed on the first mortgage exceeds the value of the property.
Another set of advantages to chapter 13 relates to the use of income instead of assets to pay creditors.
- Prevent the sale of property which the debtor is unable to protect under the bankruptcy property exemptions. Instead, payments are made through the bankruptcy plan.
- Chapter 13 may be less adversarial in some situations, promoting settlement of claims by plan payments that might have resulted in adversary proceedings filed against third-parties in chapter 7.
Chapter 13 can have utility in a number of more particularized situations as well.
- Chapter 13 requires payment of priority claims through the chapter 13 plan. Sometimes, arranging repayment on the terms bankruptcy allows might be the best way to pay this debt. If the priority debt is non-dischargable, payment through the plan allows the bankruptcy to resolve the debt, unlike chapter 7 where the non-dischargable debt would remain unpaid and collectable after bankruptcy. Domestic support obligations and certain taxes are the most common items in this category.
- Occasionally, the modestly more expansive discharge granted in a chapter 13 case might be of benefit to a debtor.
- The means testing requirements in chapter 13 are somewhat different than in chapter 7. In particular, people with substantial contributions to or loan repayments for 401(k) plans or similar retirement plans can benefit from the deduction of these contributions from disposable income available to creditors in a chapter 13 case.
- Typically, the cash outlay for a chapter 13 debtor prior to the case being filed is less than for a chapter 7. Primarily, this is due to fact that chapter 13 attorneys fees can be paid through the chapter 13 plan.
- Chapter 13 has a co-debtor stay that can offer some protection for non-filing individuals jointly obligated on a debt together with the bankruptcy filer. The chapter 13 plan can also propose to payoff these joint debts if the debtor desires to prevent collection activity against the co-obligor.
Our firm's general philosophy is evaluate if chapter 7 can provide the relief a prospective bankruptcy filer desires before investigating chapter 13 options. We do believe that the power and flexibility of chapter 13 is very worthwhile for many people struggling with debt.