Most people who choose to file for bankruptcy use the simpler and more common bankruptcy option, chapter 7, but in some cases chapter 13 may be preferable. While a chapter 7 bankruptcy offers a fast and relatively easy way to cancel many common types of debt, there is also the risk of losing some non-exempt property. Chapter 13 on the other hand does not pose any risk to the debtor in terms of losing assets, and debts are often still discharged in many cases.
Chapter 13 bankruptcy gives debtors a way to cancel a lot of debt while protecting important property and assets from creditors. Here are some important considerations that may make a chapter 13 bankruptcy preferable to a chapter 7.
Protect Valuable Non-Exempt Property
While it's true that most people that file for chapter 7 wind up losing nothing, others may not be so lucky. If you own a rental home or a vacation home, or even expensive "toys" such as a boat or off-road vehicles, these may be subject to liquidation in a chapter 7. In a chapter 13 bankruptcy though, you can keep any and all of your property and valuable assets.
Protect Co-Signers or Co-Debtors
While chapter 7 is great for protecting you from creditors, and cancels many types of debt, it doesn't grant the same protection for any of your co-signers. If you have debts that were co-signed by family or friends, and those debts are discharged in a chapter 7 case, your co-signers are still on the hook. You can be sure that creditors will go after them for the unpaid debts. If you file for a chapter 13 plan, your co-signers can be protected from creditors by the bankruptcy court, so long as a certain amount of that debt is included as part of your chapter 13 repayment plan.
Stop a Foreclosure
Any type of bankruptcy will stop a foreclosure temporarily, while the case is pending, but if you've fallen behind on mortgage payments and/or you want to modify the terms of your mortgage, you'll want to get into a chapter 13 case. A chapter 13 will not only stop a foreclosure temporarily, but it can help you keep your home permanently, help you pay past due mortgage arrears over time and help get your bank to modify the mortgage loan.
"Cram Down" Secured Debts
Only chapter 13 bankruptcy offers the ability to cram down certain secured loans. This is often called "lien stripping" and involves reducing the amount of money you owe on property such as a car or even a home equity line of credit.
How a Cram Down Works
When you buy property through a financing plan, much like you would a new car, that property becomes the collateral securing the loan. If you fail to pay your debts, the creditor can repossess the property. Often though, the property loses its value much more quickly then you are able to pay down the loan against it. This is often the case of a new car purchase. Imagine you buy a $30,000 car and you have a $28,000 loan against it. Two years down the road the car is already only worth $15,000, but you likely still owe about $22,000. In a chapter 13, that $7,000 difference could be "stripped," or crammed down, meaning you now owe $15,000. This gives you a much lower monthly car payment.
Can a Home Loan Be Crammed Down?
Current law prohibits a bankruptcy judge from stripping a primary mortgage, regardless of the value of the home. However, in many cases a second mortgage and/or a HELOC (Home Equity Line of Credit) can be stripped. Laws are changing, and there is legislation that will likely pass allowing a judge to strip a primary home loan, effectively forcing a loan modification. As of this writing, however, that is not legal.
Legal Advice and Guidance
Chapter 13 offers debtors some very interesting and powerful solutions for getting out of debt and protecting all of their property and assets from creditors. However, this type of bankruptcy is much more complicated than a simple chapter 7 case. For this reason, it's important to discuss your case with a qualified bankruptcy attorney licensed in your state before you make any decisions regarding filing a bankruptcy case.
