Chapter 13 is very different from Chapter 7 “straight bankruptcy.” It buys you time to deal effectively with your special debts.
The Main Overall Benefit of Chapter 13
The main benefit of Chapter 7 “straight bankruptcy” is the discharge—legal write off—of your debts.
You also get a discharge in Chapter 13 “adjustment of debts.” But a more immediate and often more important benefit is that you’re protected from collection action by creditors while you pay all or a portion of certain special debts. Those special debts are usually ones that Chapter 7 does not discharge, or does not help in a meaningful way.
Here are some examples of the kinds of debts that buying time under Chapter 13 helps you with.
- Home Mortgage: If you’re behind on your first mortgage Chapter 13, can give you as much as 5 years to catch up. An ongoing foreclosure is stopped. Future ones can be prevented. This buying of time gives you a much more practical way to save your home. And a much more peaceful one.
- Recent Income Tax Debts: Taxes that don’t qualify for discharge (usually because they are too recent) are subject to immediate collection as soon as a Chapter 7 is completed. Interest and penalties continue to accrue. In contrast, under Chapter 13 the tax creditors must stop collections throughout the 3 to 5-year payment plan. And generally interest and penalties both stop accruing.
- Child or Spousal Support: Chapter 7 does not buy you ANY time if you’re behind on support. Chapter 13 stops collection on the arrearage (although ongoing monthly support can continue being collected). You then have time to catch on the support over time, based on what you can afford.
- Vehicle Loans: If you’re behind on your car or truck, in Chapter 7 you have to catch up in a matter of weeks. Chapter 13 gives you years. And if the debt is more than the value of the vehicle, through “cramdown” you would probably not need to catch up at all. Plus the monthly payment can often be reduced. The term of payments may be stretch out over a longer period of time. These all buy you time. The end result is that you can keep the vehicle less expensively and with less worry.
- Unpaid Property Taxes: If you’ve fallen behind, just like a mortgage you get years to catch up. And you don’t have to worry about a property tax foreclosure in the meantime. Also, your mortgage lender can’t use your being behind on property taxes as a reason to foreclose on the mortgage.
- Student Loans: Generally you can stop paying on your student loan during your Chapter 13 case. This is especially beneficial if you do not currently qualify for an “undue hardship” discharge but expect to more likely do so later in your case. Ask your bankruptcy lawyer about how the law is enforced because it varies by region.