5 Reasons to Consider a Chapter 13 Bankruptcy

When considering bankruptcy as an option for debt relief, most people think of a Chapter 7 bankruptcy.  There are reasons why a Chapter 7 bankruptcy is good tool for most people dealing with debt, but there are also reasons to consider a Chapter 13 bankruptcy even if you are able to file for a Chapter 7 bankruptcy.  Read on for the reasons that you might want to consider filing a a Chapter 13 bankruptcy.

Foreclosure/Repossession –

Chapter 13 will stop a foreclosure or a repossession and allow a person to catch up on their past due payments.  Once a bankruptcy is filed, all collection activities must stop until the stay is lifted, either by a court order or because the bankruptcy case is closed.  The automatic stay applies to a Chapter 13 bankruptcy as well as a Chapter 7 bankruptcy.  However, a Chapter 7 bankruptcy does not allow the individual to catch up on past due payments.  A Chapter 13 bankruptcy allows individuals up to five years to catch up on the back due payments.   In a Chapter 13, a person can begin making the ongoing payments while paying back the arrearages over the course of a chapter 13 plan.  A Chapter 13 bankruptcy is a good option even if the threat of foreclosure or repossession is not immediate.  When a person falls behind on a mortgage or a vehicle loan, a lender can require that all of the past due payments are made before accepting any currently due payments.  Most of the time, a person who has fallen behind in their mortgage or vehicle payments cannot afford to pay the entire past due amount and continue current payments.  A Chapter 13 bankruptcy can help with getting caught and staying current on those loans.

Cramdown Provisions –

One of the best tools offered by a Chapter 13 bankruptcy is the “cramdown” tool for personal property, including vehicles.  In a Chapter 13 bankruptcy, if a person owes more on a car than it is worth, the person may be able to only pay for the value of the vehicle and any remaining amount owed on the car will be treated as unsecured debt.  For example, Stella has a small car that is worth $10,000, but she owes $15,000 on the car loan.  Under the bankruptcy code, Stella may be able to force the car loan lender to accept $10,000 in exchange for the vehicle.  In addition, Stella may be able to lower the interest rate on the vehicle.  The cramdown provisions only apply to personal property, including vehicles, that were purchased more than 910 day before the Chapter 13 bankruptcy or to personal property that was refinanced.  The “cramdown” tool works great with title loans on vehicles.  Most title loans, after including all of the interest, exceed the value of the car.  A Chapter 13 will allow the person to pay back the value of the vehicle.  If you are upside down on your car and your car payment is too large, then it may be worth considering a Chapter 13 bankruptcy.

Protect Assets –

Even if a person’s income allows them to file for a Chapter 7 bankruptcy, a person may have assets that they can’t exempt.  If a person has assets that can’t be exempted in a Chapter 7 bankruptcy, then the Chapter 7 trustee may sell those assets to pay back unsecured creditors.  If a person wants to keep those assets, a Chapter 13 bankruptcy will allow them to do so by paying back the net value of those assets.

Prior Bankruptcy –

Although there is no limit on how many times a person may file a bankruptcy, discharge relief is only available within certain time frames.  For example, a person can’t file a second or subsequent Chapter 7 bankruptcy if it has been less than eight (8) years since the filing of the first or prior Chapter 7 bankruptcy.  However, a person can file a Chapter 13 bankruptcy at any time after they file a Chapter 7 bankruptcy.  A person may have to wait four (4) years to file a Chapter 13 bankruptcy if they want to obtain a discharge, but they could file a Chapter 13 bankruptcy at any time if they need the automatic stay.

Non-Dischargeable Tax Debt –

Income tax debts are generally non-dischargeable, but when a person is struggling with tax debt as well as unsecured credit card or medical debt, then a Chapter 13 bankruptcy will allow that person to pay the tax debt first, before any credit card debt or personal loan debt is paid back first.    Chapter 13 also allows individuals to pay back the tax debt with no interest and with no penalties.

These are just some of the reasons to consider a Chapter 13 bankruptcy, even if you qualify for a Chapter 7 bankruptcy.  There are many benefits to filing a Chapter 13 bankruptcy and we have only just touched on a few of the reasons.

If you are facing overwhelming debt and are not sure where to turn, we urge you to reach out and set up a free consultation with our New Mexico bankruptcy lawyer to determine whether bankruptcy is the right tool for you.