When should I consider Chapter 13 over Chapter 7?

Although Chapter 7 is more widely filed, there are times that filers should consider Chapter 13 instead.

Individuals wishing to file bankruptcy typically have two choices: Chapter 7 and Chapter 13 (very few file for Chapter 11). When faced with this choice, the majority of individual filers choose Chapter 7. Although Chapter 7 is more popular, there are instances when a filer may be better served by Chapter 13.

Nonexempt property

In Chapter 7, a filer's nonexempt property-property that is not protected from sale by California or federal law-is sold to pay debts. As a result, filers that have nonexempt property, such as multiple cars, homes or luxury items that they would like to keep may be better off filing Chapter 13. During Chapter 13, there is no liquidation sale, so filers can keep all of their property throughout the process.

Foreclosures

Likewise, filers that are facing foreclosure may especially benefit from Chapter 13. As soon as Chapter 13 is filed, the automatic stay acts to stop any pending foreclosure proceedings. After that, the filer's mortgage arrearages become part of a payment plan. Under the plan, the back mortgage payments (along with other debts) are paid off over in monthly installments over a three to five-year period. Provided that the payment is made each month, the filer can stay in the house. At the end of the payment period, the filer is caught up on the mortgage and free of most other debts.

Conversely, Chapter 7 does not give as much protection against foreclosure. If the mortgage is not made or kept current during the bankruptcy process, the lender may ask the court to lift the stay and allow foreclosure proceedings to continue.

Debts that cannot be eliminated by bankruptcy

Persons carrying a significant amount of debts that cannot be discharged in bankruptcy, such as student loans (in most cases), alimony, child support or taxes, can also benefit from filing Chapter 13. Although these types of debt cannot be eliminated by either type of bankruptcy, Chapter 13 allows filers to make them easier to pay back by adding them to the payment plan. As long as the agreed payments towards the debt are made over three to five years, creditors may not take any further action to collect the debt, such as filing a lawsuit or garnishing wages.

Speak to an attorney

Although Chapter 13 may sound like the right type of bankruptcy for you, it has its own set of requirements to file. The attorneys at The Bankruptcy Center of John D. Raymond can analyze your situation and use their considerable experience to recommend the most effective debt-relief solution for your unique circumstances.