Our firm gets a lot of questions about Chapter 13 bankruptcies. Many people wonder what a Chapter 13 is, how it works, and why they would benefit from Chapter 13 over a Chapter 7.
This post will explore some of the many financial benefits to filing a Chapter 13 bankruptcy. This is not an exhaustive list and there are other reasons to consider Chapter 13 that we will not cover, such as a lack of other options due to a previous bankruptcy within the last 8 years, making too much money to file a Chapter 7 and having assets that may not be protected fully in a Chapter 7. If any of these situations applies to you, our experienced team is here to help answer any questions you may have. We offer a FREE Consultation so call today (850) 438-6603.
First Thing First: What is a Chapter 13 Bankruptcy?
Chapter 13 is for individuals who have regular income and would like to pay all or part of their debts in installments over a period of time, typically 36 or 60 months. Under Chapter 13, you must file with the court a plan to repay your creditors all or part of the money that you owe them, usually using your future earnings. After making all the payments under your plan, you will be granted a discharge for all remaining qualifying debts (some debts are excluded from discharge such as student loans, domestic support obligations and some taxes).
Benefits of a Chapter 13:
Saving Your Home from Foreclosure:
One of the main reasons many people file a Chapter 13 bankruptcy is to stop a pending foreclosure. Unfortunately, all too often, bad things happen to good people, and they get behind on their payments due to an unexpected emergency, such as a job loss, illness, death of a spouse, or any number of other hardships that prevents them from keeping their mortgage current.
When this happens mortgage companies are not always the easiest to work with. They often demand that the arrearage be paid in full via a lumpsum payment and refuse to accept regular monthly payments. Then, when the individual cannot pay it, they file a foreclosure action.
A Chapter 13 shifts the power back to the Debtor. it can be filed at any time prior to the foreclosure sale and will stop any pending sale. The mortgage company will be forced to start accepting monthly payments again, and the filer will be able to catch up past due mortgage payments and bring the loan current over a much more reasonable time frame, typically 36-60 months. The filer can also dictate the terms of the repayment, without the need to produce an immediate large lumpsum. This provides much needed time and relief for families, whom may be stressed over the thought of losing their homes, their homes equity, or about finding another place to live.
Saving Your Vehicle from Repossession:
Similarly, to the foreclosure scenario described above, Chapter 13 can be used as a tool to allow people to catch up arrearage owed on vehicles. As creditors will be barred from picking up a vehicle that is behind and forced to take payments made through the plan.
Sometimes a vehicle has too much equity, and a Chapter 7 is not a viable option because the court would require the Debtor to pay for that equity or turnover the vehicle to be sold. In many situations, Chapter 13 can be used to save equity in a vehicle that may have been otherwise unexempt in a Chapter 7.
Chapter 13 also affords additional benefits for vehicle owners if their vehicle was purchased at least 2 ½ years prior to filing their case. Debtors can often benefit from what is termed a ‘cramdown”, which allows the Debtor to potentially lower high interest rates on vehicle loans and pay the creditor back only the true value of the vehicle at the time of filing, rather than the full amount owed. This can be extremely helpful for those who owe way more on their vehicle than it is worth, otherwise known as “upside-down”.
Note: The need to act fast when it comes to being behind on a vehicle is greater than when it comes to a house. Vehicle creditors often seek to repossess vehicles after only 2-3 months of being behind on payments. Many people rely on their vehicles to get to work and provide for themselves and their families. Please contact our office if you are worried about having a vehicle repossessed due to missed payments.
Lien Stripping of Second Mortgages or HELOCs:
If the value of your house is less than what you owe on the first mortgage on the date the case is filed, you may be eligible to strip secondary liens off your property in a Chapter 13. This must be approved by the court and valuations can be tricky, but if done correctly this can be a huge benefit to those filing a Chapter 13 plan. This is no longer an option in a Chapter 7 bankruptcy.
Restructuring Your Debt and Stopping Interest from Running:
Chapter 13 can stop the outrageously high interest rates running on credit card and loan accounts, which is typically anywhere from 13% to as high as 25%. This, when coupled with lowering interest rates on vehicles paid in the plan (as discussed above) and paying the remaining balances of a vehicle over 60 months, as opposed to the remaining term, allows debtors to lower their monthly payments and consolidate their debt into one convenient payment. This payment, known as the plan payment, can be significantly lower than the combined amount they were paying on all of their credit cards and vehicle loans prior to filing their case.
There are many more benefits and situations where a Chapter 13 may be the right Chapter to file based on a person or family’s individual circumstances. There are many complex rules to consider, and no one size fits all when it comes to bankruptcy. What was appropriate for one person, may not be appropriate for another. While some people filing for Chapter 13 may be required to pay back most or all of their debts due to their income and expenses or assets, other people may only be required to pay back 2% to their unsecured creditors. Our firm offers a FREE consultation to help you better understand what your situation requires and how a Chapter 13 bankruptcy may benefit you. To learn more, give our office a call at (850) 438-6603.