If you need to file for bankruptcy, Chapter 13 should be your first choice whenever possible.
There are, for the most part, two types of bankruptcy cases that people file when they want to get out of debt – Chapter 7 and Chapter 13.
Chapter 7 is deceptively simple, involving just a few months in the court system and a quick exit to a (mostly) debt-free life.
Chapter 13 seems more difficult, with repayment plans lasting 3-5 years before you get to claim freedom from debt.
Indeed, most people who file for bankruptcy opt for the Chapter 7 route. It’s less expensive and less time-consuming.
But dig deeper into the debt-relief process and you may find that what appears simple is the less attractive option.
- You Can Leave Chapter 13 – But Not Chapter 7. Let’s say you file for bankruptcy and incur more debt due to an illness or job loss. If you’re in Chapter 13, you can dismiss your case and refile to include the new debt. But if you’re in Chapter 7, you’re stuck – and will walk out owing that fresh debt.
- Chapter 13 Is A Hedge Against Future Debt Problems. If you file for Chapter 7 bankruptcy, you can’t do it again for the better part of a decade. But file a Chapter 13 and you get your choice of bankruptcy far sooner if need be.
- Chapter 13 Means You Keep Everything. When you file a Chapter 7 bankruptcy you need to worry about losing nonexempt assets and cash. If you own real estate that rapidly increases in value before the end of your case, you could find yourself packing your bags rather than being able to keep the property. No so in Chapter 13, which allows you to repay a portion of your debts in exchange for keeping all of your assets.
- Chapter 13 Repayment Can Be Tiny. When you file a Chapter 13 bankruptcy case, you’re paying back creditors based on your income and the value of your assets. For many people, that means repayments can be as low as $150 per month or less.
- Chapter 13 Is Totally Voluntary. A Chapter 13 bankruptcy case can be freely dismissed. Your repayment plan can be modified based on a change in your financial circumstances. You’re in 100% control over your life.
- Catch Up On The Mortgage Or Car Loan. Lots of people use Chapter 13 as a tool to catch up on arrears. Chapter 7 bankruptcy can’t do that.
- Lower Your Car Loan Interest Rate In Chapter 13. When you file a Chapter 13 bankruptcy, there’s a way to lower your automobile loan’s interest rate. That means you can reduce your monthly car expenses without losing the vehicle or trying to refinance.
- Wipe Out Underwater Second Mortgages In Chapter 13. If you own real estate and are upside down on your second mortgage, you may be able to eliminate it by filing for Chapter 13 bankruptcy.
- Pay Tax Debts Without Interest Or Penalties. If you owe money to the government for tax debts, you can pay them off over 3-5 years without a dime of additional interest or penalties. That could save you thousands of dollars over the life of your Chapter 13 bankruptcy case.
- Pay Your Legal Fees Over Time, Not Up Front. Yes, Chapter 13 bankruptcy fees are somewhat higher than what you’ll pay for a Chapter 7 case. But when you file for Chapter 7 you’re going to need to pay your legal fees in full before the case is filed. In Chapter 13, you can file your case more quickly because your legal fees can be paid through the repayment plan.
Still not convinced? Maybe you’re the exception to the rule.