The debate over whether to file a Chapter 7 or Chapter 13 Bankruptcy is one which an attorney can best explain. The following provides some general guidance. Both types of bankruptcy have their advantages and disadvantages. This article describes when a Chapter 13 is beneficial to a Chapter 7 bankruptcy.
1. Chapter 13 is the only way to remove a second mortgage from your home. This depends on the proficiency of your bankruptcy attorney. The valuation of the property is also necessary. You should be able to prove that the value of the home is less than that of the first mortgage. In case it is more or very close, the creditor may raise objections. The decision of the judge will be final and binding on all parties.
2. You have the chance to prevent a foreclosure when you opt for Chapter 13 bankruptcy. You can bring the loan payment current within a period of 3 to 5 years while resuming regular monthly payments on the loan. Similarly, you can prevent repossession of vehicles in the same fashion.
3. If you do not qualify for a chapter 7 bankruptcy because your income is too high, or you filed chapter 7 in the last 8 years and received a discharge, a Chapter 13 may provide some much-needed breathing room. This type of bankruptcy has a provision for consolidating all the loans into on single payment which is made to the trustee. The court must approve the repayment schedule which is based on disposable income. Any balances at the end of the bankruptcy period get automatically discharged. Usually, people end up paying a fraction of what they owe.
4. Income is the primary criterion for determining the monthly payment in a chapter 13. A chapter 13 repayment is spread out over a period of 3 to 5 years. Low wage earners have an advantage over the high wage ones. The criterion is the income level and not the debt level.
5. You may file Chapter 13 bankruptcy even if you had filed one before. Your attorney will check out the date of filing and advise you accordingly.
6. Vehicle loans may receive special treatment. If the value of the vehicle is lower than the outstanding loan balance, the Chapter 13 allows you to reduce the loan principle balance to the value of the car (loan principle = vehicle value) provided you took-out the car loan at least 910 days before the date of filing bankruptcy.
7. Some debts are not dischargeable in a Chapter 7 but are dischargeable in a chapter 13 or receive special treatment in a 13. The Chapter 13 has a provision to treat certain debts, like tax debts as priority. Priority debts get paid before all other debts. Similarly, you get a discharge of fraud debts in Chapter 13 but not in Chapter 7. This is the Chapter 13 super discharge effect.
8. If you have significant non-exempt properties, a Chapter 13 is preferable because the properties are not attached. However, your repayment should be such that your creditors get as much amount in the Chapter 13 as they would have received under liquidation in Chapter 7.
9. Chapter 13 shows an inclination to repay the debts. Hence, future lenders have a different view as compared to the Chapter 7. A chapter 13 looks better on your credit reports.
Your bankruptcy attorney can advise you accordingly.