Chapter 13 bankruptcy is my favorite type of bankruptcy because of what a debtor can do to deal with debt.
What is a Chapter 13?
It helps a person reorganize debts and may be one of the best ways to save a home.
Over a 3-5 year period, debtors make payments to a trustee, who disburses the funds to creditors.
Unpaid debts remaining at the end of the 3-5 year period are discharged.
Secure creditors will receive money by the trustee or directly by the debtor.
Unsecured creditors receive payments only if there is income left over beyond what is necessary to pay:
- living expenses,
- secured creditors
- any priority creditors
Chapter 13 often “cures” defaults on residential mortgages and allow homeowners to reinstate delinquent home mortgages.
Debtors may file Chapter 13 if they are above the state’s median income.
However, just because you’re over median income doesn’t necessarily mean you must file a Chapter 13.
What Is A Chapter 7?
Because of the deduction of expenses, even people above median income can qualify for a Chapter 7.
There are several reasons why filing Chapter 13 is preferable to a Chapter 7.
These include the ability to repay nondischargeable debts like:
- child support obligations and student loans
- the ability to “cram down” the debt on some vehicles
- the ability to repay pension loans
- the exclusion of child support income from your required budget
- the increased protection for co-debtors
- the reduced impact on your credit score
- and the ability to address complex issues like excess equity in a homestead.