Chapter 13 is a type of bankruptcy where you file a repayment plan with the bankruptcy court to pay back some or a portion of your debts over three to five years. Chapter 13 plans operate very much like a consolidation loan, in that, debts are consolidated into one monthly payment which is paid to a Trustee and the Trustee then pays the creditors.
The 7 major benefits to a Chapter 13 are:
1. A Chapter 13 can be used to repay certain debts that a Chapter 7 cannot, such as fraudulent debts, child support, divorce settlements, taxes less than 3 years old and student loans.
2. If you can’t finish paying the plan but you have repaid the majority of the Chapter 13 payments you can get a “hardship” discharge for having made most of the repayments as long as you have repaid what a 7 would have repaid. The plan can also be modified or lowered or increased. If your Chapter 13 is dismissed voluntarily or due to a willful violation of a court order, you may not obtain a discharge by filing another Chapter 13 for years. You may be able to obtain the stay to stop a foreclosure by proving that it will work a second time but you won’t get a discharge of your unsecured debts. If it was dismissed involuntarily due to no fault of your own, you can re-file immediately. If you were in a credit counseling plan and fail to finish paying payments you go back to owing as much as you originally owed
3. If you can’t finish the repayment, a Chapter 13 can also be converted to a Chapter 7. This is often useful if you filed a Chapter 7 less than 8 years ago and you need relief now but want to convert later.
4. A Chapter 13 protects co-signers, as long as the Chapter 13 pays the debt in full, and it allows you to keep property that you might otherwise have to turn over in a Chapter 7 liquidation bankruptcy. (A Chapter 7 does not protect co-signers and only protects joint property belonging to the Debtor while the Chapter 7 stay is in effect.)
5. Chapter 13 is often used to stop foreclosures or refinance a mortgage. After just one year after you start a Chapter 13, agency lenders (VA FHA HUD KHC) can refinance or finance a home mortgage at prime rates even while you are in a Chapter 13 if you repay on time while you are in the Chapter 13.
6. You can also avoid (destroy) a second mortgage that has no equity in a Chapter 13. However you must prove that if the house sold that no money would go to the Second mortgage.
7. You can also effectively discharge many of your debts in a 13 by reviewing your debts prior to them being approved to be paid. If you file motions to object to questionable debts then many lenders will not bother to supplement their claim or fight your objection.
Stephen M. Dunne, Esq.
Dunne Law Offices, P.C.
1500 JFK Blvd, Two Penn Center, Suite 200
Philadelphia, PA 19102