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What Makes Chapter 13 So Special?

Would you like to favor certain important creditors over others? Often, Chapter 13 makes this possible.

Leveraging the Bankruptcy Laws

One of the basic principles of the United States system of bankruptcy is that it does not allow favoring some creditors over the others. That is, not unless that favoring is recognized as justified in the eyes of the law. In a variety of ways, creditors are recognized as legally different. For example, secured creditors have rights to collateral that unsecured creditors don’t. And certain debts can’t be discharged (written-off) in bankruptcy, such as child support, many types of taxes, and most student loans. Chapter 13 is a particularly good tool for leveraging in your favor the ways these and other ways that the law allows—indeed requires—you to treat creditors differently.

Here are two good illustrations.

Curing First Mortgage Arrearage

The law highly favors residential first mortgage lenders. The theory is that these lenders should be treated well in bankruptcy to lessen their risks, thereby encouraging more investment in the residential mortgage capital markets, to make mortgages more readily available for future homeowners.

So, if you were behind on your home mortgage and wanted to keep the home, in a Chapter 13 case you would be required to make payments on the arrearage and bring it current before you could get out of the case. But, because in a Chapter 13 payment plan you are usually only required to pay what you can afford, this means that catching up on your mortgage most of the time results in many or most of your other creditors getting paid less. Sometimes these other creditors may even not be paid anything, just so that you can afford to save your home. If your home is one of your highest priorities, and you are behind on the mortgage payments, then consider using Chapter 13 to favor your payments to catch up on those missed payments.

Child Support Arrearage

Another kind of debt that is highly favored in the law is child support, for rather obvious reasons. As a result, if you get behind on support payments, the collection procedures that can be used against you are extremely aggressive. In most states it includes the possibility not only of losing your driver’s license, but also your occupational or professional license—your livelihood could be taken from you.

Chapter 7 “straight bankruptcy” provides no direct help if you owe back support. The “automatic stay” that protects you from other creditors does not even apply to support debt under Chapter 7. This means that the aggressive collections can just continue; the bankruptcy filing has no effect on it.

But in a Chapter 13 “adjustment of debts,” you ARE protected from support collections, as long as you follow the rules—keep strictly current on ongoing regular support payments and on the Chapter 13 plan payments. Through those plan payments, you are required to pay off the entire support arrearage before completing the case. But you want to pay it off because you don’t want to owe any when you finish the case and lose the protection it provides.

Similar to home mortgage arrearages, you can essentially take money away from your other creditors in order to pay off the support arrearage. Indeed, in most situations, your support arrearage is paid 100% before you pay anything to the rest of your unsecured creditors. 

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