Chapter 13 bankruptcy requires years of commitment to a payment plan. It is a much longer process than Chapter 7 bankruptcy.
Each person contemplating bankruptcy has unique circumstances that influence the best approach to the process. There are numerous circumstances in which a Chapter 13 bankruptcy is clearly a better solution than a Chapter 7 filing. The three situations below are among the most common reasons that people choose Chapter 13 bankruptcy.
1. Ineligibility for Chapter 7
Not everyone is actually able to file a Chapter 7 bankruptcy. Only those who pass a means test comparing their adjusted income to the state median income for their household size can file a Chapter 7 bankruptcy. Those with above-average income may find that Chapter 13 proceedings are their best option.
2. Owning non-exempt property
In a Chapter 7 bankruptcy, the filer has to provide an inventory of their assets to the bankruptcy trustee. They may need to liquidate certain assets that they cannot exempt. If the value of non-exempt assets is higher than the amount of debt involved, a Chapter 7 bankruptcy may not be the best option. A Chapter 13 bankruptcy, where liquidation is not mandatory, may be the better option.
3. Concerns about secured debts
Secured debts such as mortgages and vehicle loans are not eligible for discharge during bankruptcy proceedings. However, bankruptcy filers may be able to alter the terms of their loans by negotiating a modification. Those struggling to make car or mortgage payments may find that their lenders are more receptive to modification discussions in a Chapter 13 bankruptcy case.
There are many reasons why people might choose Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Choosing the right form of personal bankruptcy can make a major difference for those dealing with temporary financial struggles.