Four situations where you might want to consider Chapter 13

Although Chapter 7 bankruptcy is better known, there are times when you would be better served by Chapter 13.

In general, when people file bankruptcy, more choose Chapter 7 over Chapter 13. Although Chapter 7 is more popular than Chapter 13, it should not automatically be discounted if you are considering bankruptcy. There are four instances when Chapter 13 may be more helpful to you than Chapter 7.

Your house is in foreclosure

If you have fallen behind on payment of your mortgage debt, Chapter 13 is especially helpful in saving your home from foreclosure. As soon as you file Chapter 13, the automatic stay immediately stops the foreclosure process. You provide a plan for your overdue payments on your mortgage to get caught up, on terms you can afford. Under the plan, you make a monthly payment towards to get back on track and caught up over three to five years. Since the payments are stretched out over a long period, the monthly payments are kept affordable. If you continue making payments each month, your lender is prohibited from restarting the foreclosure process.

By the time Chapter 13 has ended, you are caught up with your mortgage and free of most other pre-bankruptcy debts. You then continue making your regular payments on your mortgage as you normally would.

Many people do not realize that Chapter 7 does not offer this type of protection against foreclosure. In Chapter 7, if you cannot bring your mortgage current, you may once again face foreclosure, once your lenders have asked the court to lift the automatic stay to pursue foreclosure.

You own nonexempt property

Chapter 7 works by selling your unencumbered nonexempt property to pay your debts. If you own property that is not exempt from the liquidation sale (e.g. multiple cars, houses or luxury items) that you would like to keep, Chapter 13 may be better for you. Unlike Chapter 7, where these items would be lost in the liquidation sale, Chapter 13 allows you to hold on to them, as long as you fulfill your duties under the payment plan.

You have nondischargeable debts

Contrary to popular belief, bankruptcy does not discharge all the debts that you may have. Debts such as child support, alimony, student loans (in most cases) and most taxes are not eliminated in bankruptcy. However, Chapter 13 can help these debts become more manageable by making them part of the payment plan, which gives you three to five years to repay them. As long as you keep up with the payments, Chapter 13 protects you against any collection actions (i.e. garnishment or lawsuits) regarding the debts.

You have two mortgages on your home

If you have two mortgages on your home and your house is not worth as much as the amount owed on the first mortgage, you may be able to wipe out the second mortgage in a Chapter 13. This is commonly called a "Strip Down." You cannot do this in a Chapter 7 case. Even though property values have rebounded of late, this may still be an option for you. It is possible to do a strip down even if you are not behind on your mortgage payments.

An attorney can help you decide

Choosing the correct type of bankruptcy to file can mean the difference between getting back on your feet and wasting your time. As such, it is always important to consult with a bankruptcy attorney before filing. An attorney can analyze your situation, give you the pros and cons of each type of bankruptcy, and recommend the one that would provide the best solution possible.