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What advantages does Chapter 13 offer?

According to recent data from the U.S. Bankruptcy Courts, the economy seems to be improving in central Pennsylvania. Bankruptcy filings have declined in the federal court circuit, which includes Harrisburg from 8,797 in 2012 to 6,763 in 2013. Although the data may be positive, many people who managed to stay employed during the recession are still struggling with debt. Additionally, many that were laid off and found employment had to settle for positions with wages significantly lower than their former jobs.

If you are employed, but behind on your debts, Chapter 13 bankruptcy may be the best way to alleviate your financial problems. In Chapter 13, the filer must have a steady income, since debts are consolidated into a payment plan and repaid over a three to five-year period. The amount that you pay towards your debts each month is determined by your disposable income.

Why choose Chapter 13?

People choose Chapter 13 over Chapter 7 for many reasons. Chapter 7 may require debtors to sell off their nonexempt property to pay off their debts. For debtors with large amounts of nonexempt assets, Chapter 13 allows them to keep their property throughout the bankruptcy process. In addition, Chapter 13 offers other benefits such as:

  • Better protection of collateral. Chapter 13 allows you to catch up on any delinquent secured debt (i.e. car loans or mortgages) over the three to five-year payment period, maximizing your chances of keeping your house or car. In Chapter 7, if these debts are not immediately made current, the collateral must be surrendered to avoid foreclosure or repossession.
  • Help with second mortgages. If you are struggling with a second mortgage that is worth more than the value of your house, Chapter 13 may be able to eliminate your second (or third) mortgage debt.
  • Tax debts.If you owe significant back taxes, but cannot negotiate a payment plan with the IRS, Chapter 13 allows you to pay your taxes over the repayment period.

Additionally, many people choose Chapter 13 because their income makes them unable to file Chapter 7, because of a means test.

It may seem like every debt must be fully repaid in Chapter 13, but this is not the case. Although certain priority debts like taxes, alimony, child support and administrative expenses must be repaid in full under the plan, most unsecured debts (e.g. credit cards or medical bills) are discharged at the end of bankruptcy. As a result, most people find that their unsecured debt receives the same treatment in Chapter 13 as it does in Chapter 7.

Chapter 13 offers those that seek its protection many benefits. However, it is not the right type of bankruptcy for everyone. An experienced bankruptcy attorney can listen to your financial situation and recommend the best way to regain your financial footing.