Compared With Straight Bankruptcy, What Advantages May There Be to Filing for Chapter 13?

There may be several advantages.

First, you will be able to retain and use all your assets as long as you make payments to the trustee as agreed. There is an important difference between the treatment under Chapter 13 of two types of your secured creditors: those who have a lien on your home and those who have a lien on some other asset. For example, say that you have an unpaid balance on your car loan of $8,000, but that the car is worth only $5,000. In that case, the court will approve the "cram down" of the loan to $5,000 as the secured claim, with your monthly payments reduced to reflect that lower balance. In most cases the law requires that little or nothing be paid on the car lender's $3,000 unsecured claim. (If you cannot make the required monthly payments on your car, you must return it, unless the creditor agrees otherwise.)

However, the story is quite different for your home mortgage. Even if the market value of your home has fallen below the unpaid balance on your mortgage, the court generally cannot "cram down" the amount you owe on your mortgage to the market value of your home. While you can put accumulated past delinquent mortgage payments (with interest to account for your delay) under the Chapter 13 plan, you must make future monthly payments on your home mortgage loan, or turn your home over to the lender.

Second, the discharge of debts under Chapter 13 is broader than it is under Chapter 7. Once you successfully complete a repayment plan under Chapter 13, individual creditors cannot require you to pay them in full, for example, even if you gave them false financial information when you applied for the credit, or if you used some other fraudulent means to get credit. The story is different if you file for straight bankruptcy. Then any credit grantor to whom you gave false or fraudulent information may object to discharging you from repaying the debt you owe it.

Third, under Chapter 13, if you had people co-sign any of your loans or other credit, your creditors cannot collect from these co-signers until it is clear that the Chapter 13 plan will not pay the entire amount owed to the creditors. In contrast, if you file a straight bankruptcy (Chapter 7) petition, your creditors have the right to demand payment from your co-signers immediately.

Fourth, you may discharge debts under Chapter 13 more often than under Chapter 7. The law forbids you from receiving a discharge under Chapter 7 more than once every six years. However, Chapter 13 allows you to file repeatedly, although each filing will appear on your credit record and all Chapter 13 plans have to be filed in good faith. Note, however, that after you have been discharged under Chapter 13, you must wait six years you are eligible for Chapter 7 discharge. That six year rule does not apply if your Chapter 13 case paid your unsecured creditors at least 70 percent of their allowed claims and your plan was proposed by you in good faith and was your best effort.

Family Legal Guide
Copyright © 2000, 2002 American Bar Association