Often referred to as “reorganization bankruptcy,” chapter 13 makes paying back creditors more manageable by implementing a three- to five-year repayment plan. If any applicable debts remain after the plan has ended, they’ll be discharged, thereby providing a clean slate.
Because Chapter 7 discharges debt immediately, on the other hand, many debtors find it preferable to chapter 13. If you happen to be eligible for both, though, consider the following potential advantages of chapter 13 before assuming chapter 7 is the better option:
1. Prevents Foreclosure
If your mortgage lender is willing to work with you, filing for chapter 13 could make it possible to catch up on missed payments, thereby preventing foreclosure. If you can roll the past-due amount into the repayment plan while still making monthly mortgage payments, for example, you may be able to keep your home.
2. Modifies an Upside-Down Car Loan
If your vehicle is worth less than your car note and you purchased it more than two and a half years ago, chapter 13 may be able to modify the loan so it matches the value of the auto. There’s a doctrine in bankruptcy law called lien stripping, which essentially allows the court to alter secured debt so it meets the value of the collateral to which it corresponds. In regard to real estate, this might include eliminating additional liens, which explains the term “lien stripping.”
3. Reduces Interest
The chapter 13 repayment plan will be organized in such a way that you only have to pay back the balances you owe on the day you file. In other words, interest will not accrue over the three to five years that you’re making payments. Depending on just how much debt you have—and how much interest it carries—this could save you thousands or even tens of thousands of dollars over the course of the bankruptcy.
4. Eliminates Medical Debt
If you’re in a dire financial position because of mounting medical bills, chapter 13 can erase all of them. If your illness or injury forced you out of work, chapter 13 can also eliminate any credit card debt you accumulated as a result.
5. Allows You to Retain All Your Property
Because it entails a repayment plan, chapter 13 doesn’t require petitioners to liquidate nonexempt assets like second homes, extra vehicles, or valuable collections. If you were to file for chapter 7, on the other hand, you might end up losing some of your most cherished possessions during the proceedings.
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If you’re in over your head financially, turn to Brown Bass & Jeter, PLLC for guidance. Our attorneys have 40 combined years of experience in legal practice.