I hear this statement on a daily basis. “I do not want any part of a chapter 13. I am only interested in filing a chapter 7.”
I think anyone who knows anything at all about bankruptcy would concur that, all other things being equal, a chapter 7 filing is a more attractive scenario. Unfortunately, there are many people who either don’t qualify for a chapter 7, or who have circumstances that make a chapter 13 filing necessary.
Here are some good reasons to file for Chapter 13:
When You Cannot File for Chapter 7
You will not be allowed to file for Chapter 7 if you cannot meet some new requirements imposed by the 2005 revisions to the bankruptcy laws. Under these new rules, you cannot file for Chapter 7 if both of the following are true:
- Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state (go to the website of the United States Trustee, www.usdoj.gov/ust, and click “Means Testing Information” to see the median figures for your state).
- Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the “means test” — if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy.
The means test can get fairly complex and, to make matter worse, Congress has its own definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms which, in some cases, can make your income seem higher than it actually is.
In addition, if you have received a Chapter 7 bankruptcy discharge within the last eight years or a Chapter 13 discharge within the last six years, you may not file for Chapter 7 bankruptcy.
When You Are Behind On Your Mortgage or Car Loan
If you want to make up the missed payments over time and reinstate the original agreement, you can in Chapter 13 bankruptcy. For example, if you are six (6) months behind on your mortgage payment of $2,000.00, within thirty (30) days of filing your bankruptcy petition you would have to come up with $12,000 in a Chapter 7 to stay in your house, however, in a Chapter 13 you do NOT have to come up with any money for missed payments. The missed payments are repaid through the Chapter 13 plan.
When You Have A Second Mortgage You Want To “Strip”
In a Chapter 13, if the value of your home is less than the amount you owe on your first mortgage you can “strip,” or in lay terms, eliminate your second mortgage. So, say the value of your home is $175,000 with have a first mortgage of $200,000 and a second mortgage of $150,000, in a Chapter 13 bankruptcy you completely eliminate the second mortgage and only pay on the first mortgage.
When You Have a Debt That Cannot be Discharged in Chapter 7
Tax obligations, student loans, or other debts that cannot be discharged in Chapter 7 can be included in your Chapter 13 plan and paid off over time.
When You Have a Sincere Desire to Repay Your Debts
You can benefit from the protection of the bankruptcy court if creditors are coming after you. The Chapter 13 process also provides the formal structure and deadlines that can you might find helpful in order to follow through on your good intentions.
When You Have Nonexempt Property You Want to Keep
When you file for Chapter 7 bankruptcy, you may keep only exempt property defined as property protected from creditors under state or federal law. You must give your nonexempt property to the bankruptcy trustee who can sell it and distribute the proceeds to your creditors.
In Chapter 13, however, you don’t have to give up any property. Instead, you repay your debts out of your income. Therefore, if you have nonexempt property that you do not want to part with, Chapter 13 might be the better choice.
When You Have a Co-Debtor on a Personal Debt
If you file for Chapter 7 bankruptcy, your co-debtor will still be on the hook which means your creditor will undoubtedly go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments.
If you would like to speak with a qualified bankruptcy attorney who can help you decide if bankruptcy is right for you, and if so, whether Chapter 7 or Chapter 13 bankruptcy is right for you, please contact us.
