Chapter 13 is not usually the first choice for those who need to file bankruptcy. Chapter 7 is, and as a result the most popular form of bankruptcy. Chapter 7 is the fastest, easiest, and least expensive form of bankruptcy.
Chapter 13 if often used by people who for one reason or another are not eligible to file for Chapter 7 or to receive a Chapter 7 discharge of debt. This could be because of a prior Chapter 7 bankruptcy filing or because the debtor’s income is too high to easily pass what is known as the Means Test. The Means Test is designed to force people into Chapter 13.
There are many other reasons to use Chapter 13. These are strategic reasons specific to the goals and circumstances of each debtor. Some of these strategic reasons or uses are as follows:
- Keep your house. Chapter 13 not only halts the foreclosure action but also allows you to deaccelerate the loan. You may pay the mortgage loan arrearage over as long as (5) five years, without interest.
- Keep non-exempt assets. In Chapter 7 the trustee liquidates non-exempt assets. In Chapter 13 you may keep those assets provided you pay their value into the plan. This allows you up to 60 months to do so.
- Lower interest rates. Chapter 13 allows you to force lower interest rates on secured loans. The applicable rate is what is known as the till rate. This is approximately 1.5% over the prime rate.
- Cramdown secured debt. Chapter 13 allow you to cramdown most secured debts. This means you pay the creditor the value of the collateral, as opposed to the amount owing on the loan. If your car is worth $10,000 but you owe $15,000, you pay only $10,000. And those payments can be spread out over up to (5) five years.
- Force tax authorities to accept installment payments. Non-dischargeable taxes may be paid over the full 60-month duration of the plan. Sometimes this is better than what the tax authorities will voluntarily accept.
- Discharge divorce debts. Debts arising from a divorce are not dischargeable in Chapter 7. They may be dischargeable in Chapter 13 excepting domestic support obligations (primarily child support and maintenance).
- Expanded discharge. There are a few other debts which can be discharged in Chapter 13 but not in Chapter 7.
- Enhanced negotiating leverage. Sometimes you never really wanted the bankruptcy at all, but creditor actions were forcing you to file. We find that filing a Chapter 13 enables us better to then go and negotiate with the creditor, the settlement we originally wanted. We can then dismiss the Chapter 13.
- Automatic dismissal. The debtor almost always has a virtually unfettered right to dismiss the case at any time. This can be valuable when circumstances change.
In Chapter 13 we will devise a plan to meet whichever of these goals or needs you have. That plan will last 3-5 years, and you will make monthly payments throughout that time. You receive your discharge at the end of the plan.