Chapter 13 may be the best type of bankruptcy for you

Persons owing certain types of debts may benefit from filing Chapter 13 instead of Chapter 7.

Many people that are in a position to file bankruptcy assume that Chapter 7 is always the right type for them. In many cases, filing Chapter 7 is the right move, however for some, Chapter 13 is the better way to go. In order to decide which type of bankruptcy is right for you, it is helpful to understand the situations where Chapter 13 is especially beneficial.

Chapter 13 bankruptcy works differently than Chapter 7. Instead of a sale of nonexempt assets to pay the filer's debts, Chapter 13 consolidates the filer's debts into a payment plan. Under the plan, most debts are repaid in monthly installments over a three to five-year period. The amount of each monthly payment is based on the filer's disposable income, so it is very affordable. For many in certain debt situations, filing Chapter 13 instead of Chapter 7 is the best way to deal with the debt.

Owning nonexempt property

For those that owe nonexempt property (e.g. multiple homes, cars or other luxury items) that they would like to keep, Chapter 13 is a better choice than Chapter 7. Since this type of property is nonexempt, it would be sold during Chapter 7 to pay the filer's debts. Chapter 13 allows the filer to keep the property as his or her debts are repaid under the payment plan.

Facing foreclosure

Chapter 13 is generally the better type of bankruptcy for those facing foreclosure. Once Chapter 13 is filed, the foreclosure proceedings are immediately halted. Then the mortgage debt is consolidated into the payment plan, allowing the filer three to five years to pay back the arrearages. As long as the monthly payments are made under the plan, the lender may not reinstitute foreclosure proceedings.

Although Chapter 7 can temporarily delay foreclosure proceedings, it cannot stop them completely unless the mortgage debt is immediately made current (and kept current throughout the bankruptcy).

Being underwater on second mortgages

Filers that owe more than their home is worth on their second mortgages or home equity lines of credit can benefit from Chapter 13. Under the bankruptcy laws, this type of debt can be eliminated completely in a process called lien stripping. Once the Chapter 13 process is completed, the filer emerges without having to pay the second mortgage debt.

Owing nondischargeable debt

Filers that owe debts such as income taxes, alimony or child support can benefit from Chapter 13's payment plan. Although no type of bankruptcy eliminates this type of debt, Chapter 13 allows the filer three to five years to catch up with what they owe. While it is being repaid, Chapter 13 prohibits creditors (e.g. the IRS) to garnish the filer's wages or make any other attempts to collect the debt.

An attorney can help

Although Chapter 13 is a powerful tool, it is not always the right solution. If you are in a sticky debt situation, it is important for you to consult with an experienced bankruptcy attorney. An attorney can consider your financial situation and recommend the best course of action for you.