Is Chapter 13 bankruptcy right for me?

For some people, Chapter 13 is a better way to deal with their debt problems.

If you are considering bankruptcy, you may assume that Chapter 7 is the best type of bankruptcy for you. Although this may sometimes be a correct assumption, you may be better served by filing Chapter 13 bankruptcy in some cases. Because of this fact, it is helpful to make yourself aware of the situations where Chapter 13 is particularly advantageous.

You own significant nonexempt property

In Chapter 7, assets that are not exempt by law are sold to pay your debts. Nonexempt property includes multiple houses, cars and luxury items. If you own such assets and would like to keep them, it is generally better to file Chapter 13. Instead of a liquidation sale, Chapter 13 allows you to keep all of your assets, as your debts are consolidated and repaid though a payment plan.

You are facing foreclosure

If you are in danger of losing your house through foreclosure, it is particularly advantageous to file Chapter 13. Once you file bankruptcy, the foreclosure proceedings are immediately halted through the automatic stay. In Chapter 13, your mortgage arrearages become part of the payment plan and are repaid over three to five years. During this time, you may remain in your home without the threat of foreclosure, as long as you continue making monthly payments under the plan.

Chapter 7, on the other hand, can delay foreclosure, but cannot stop it completely, unless you are able to bring your mortgage debt current and keep it current throughout the bankruptcy process.

You are underwater on a second mortgage

If you have more than one mortgage and your total mortgage debt exceeds the value of your home, Chapter 13 can help. In Chapter 13, underwater second mortgages can be eliminated through a process called lien stripping. Basically, this means that your obligation to repay your second mortgage is discharged, allowing you to focus your efforts on staying current on your first mortgage.

You owe significant amounts of nondischargeable debt

If you owe debt that cannot be discharged in bankruptcy, such as taxes, alimony or child support, filing Chapter 13 is beneficial. It gives you three to five years to repay this debt while preventing creditors (such as the IRS) from garnishing your wages or taking other actions to collect the debt. This is a feature that Chapter 7 does not offer.

Consult an attorney

Chapter 13 is a powerful means of helping you with a hopeless debt situation. However, it is not appropriate in all cases. To find out more if it is right for you, speak with an experienced bankruptcy attorney. An attorney can consider your individual situation and recommend the best way to proceed.