Chapter 13 bankruptcy is a process where the debtor reorganizes their debt. It is different from a Chapter 7 for many reasons. The biggest difference is that Chapter 13 is a longer process and debts are repaid as opposed to immediately being discharged from your debts. There are numerous reasons why a debtor would file Chapter 13, but it is a big commitment and not a decision that should be made without consulting an attorney.
Reasons for Filing Chapter 13 Instead of Chapter 7
- Too Much Income
- Keep Assets
- Avoid Foreclosure
- Tax Debt
Too Much Income
If you make too much money to file a Chapter 7, you will automatically have to file a Chapter 13 if you want bankruptcy relief. Back in 2005, the courts made it more difficult to qualify for Chapter 7 by creating income requirements and the Means Test. If your income is over the median income, you will be required to take the Means Test. The Means Test takes your monthly expenses, such as mortgage loans, car payments, taxes, insurance and child care among other expenses and puts them in a formula that will determine whether you pass or fail the test. If you fail the Means Test, your only bankruptcy option is Chapter 13.
It is important that your income be sufficient if you want to file a Chapter 13. You will be making monthly payments to the court and if you miss one, your case can dismissed.
Keep Assets
A huge reason for filing Chapter 13 is related to assets owned by the debtor. Although a debtor may qualify for Chapter 7, their assets may not be fully exempt. Every state has their own exemption requirements and most major assets can be protected. However, some situations occur where the debtor cannot protect their assets with the exemptions and will be forced to make a tough decision. Assets which can sometimes be kept include: cars, jewelry, boats, and even property in some situations.
A Chapter 13 allows the debtor to keep the asset, as opposed to surrendering it in a Chapter 7, by paying the non-exempt value of the asset over time. In a Chapter 7, the assets would have to be paid off within a year. In a Chapter 13, the timeline can extend three to five years, which makes the monthly payment amount much easier for the debtor to handle.
Avoid Foreclosure
Another reason to file a Chapter 13 is foreclosure. Most debtors want to keep their home despite being in foreclosure proceedings. Chapter 13 is the most efficient way to do that as there are mortgage mediation programs designed to work out a solution for both the creditor and the debtor.
The timeline for a bankruptcy also allows for the debtor to pay back the overdue balance owed on the mortgage, as the average Chapter 13 lasts three to five years. Chapter 13 will normally be the best option for any debtor who wants to save their home. you determine whether you should file a Chapter 13 to save your home.
Tax Debt
If you owe the I.R.S. money, there is a good chance that Chapter 13 is the best option for you. If your taxes are not dischargeable under a Chapter 7, then you might want to consider a Chapter 13. The Chapter 13 process will toll any interest owed during the bankruptcy, which can save you countless dollars. In addition, you will have three to five years to pay off the balance owed, which will make your monthly payments more affordable in most situations.
Chapter 13 is a complicated process and not one that a debtor should go through alone. There is too much at stake: your home, your assets and your income are all seriously affected by the decision you make in choosing whether to file a Chapter 13.
Jeff Kelly is an experienced and knowledgeable Rome GA Chapter 13 bankruptcy lawyer and will help you navigate the tough waters that make up a Chapter 13 case.