Most people understand that “filing for bankruptcy” means that an individual is seeking a way to try and stop paying their debts. What most do not know is that “filing for bankruptcy” doesn’t always mean not paying your debts. In fact, an individual filing a Chapter 13 is highly likely to repay their debts over a period of time, usually 60 months. Only in a Chapter 7 will an individual likely not repay their debts, with certain exceptions of course.
A Chapter 13 is typically referred to as a “wage earner” plan where debtor(s) pay back their debts over a period of time. For most, this includes payments for a mortgage, a vehicle, income taxes, child support arrears and other secured debt that must be repaid in order for the debtor(s) to keep the collateral. A secured debt is one that is secured by property like a vehicle, house or furniture. Often, debtors facing foreclosure will file a Chapter 13 to have the opportunity to pay back the past due arrears, stop the foreclosure and pay the current mortgage payment through the Chapter 13 plan. Debtors facing repossession of a vehicle may also consider Chapter 13 to pay back the arrears owed on the vehicle and may even qualify to pay back the Kelley Blue Book value of the vehicle, known as the “cramdown.”
A Chapter 7 is typically referred as a “straight bankruptcy” where debtor(s) can seek to discharge all unsecured debt and certain income taxes and can surrender secured items without a deficiency balance. Chapter 7 bankruptcy is reserved for those individuals who qualify based on their income and do not have nonexempt assets. However, there is no “cure” or “payback” mechanism so debtors seeking a Chapter 7 remedy should be current on their mortgages and vehicles if they plan on keeping those assets and paying off the debt.
The choice between a Chapter 13 and Chapter 7 must be reviewed by an experienced attorney after careful consideration of all the debtors’ financial data, including asset valuation, income, expenses and amount of debt. Debtors may have different goals and expect different outcomes as a result of filing bankruptcy so it is a decision not to be entered into lightly and without proper guidance. If you are experiencing financial hardship, do not hesitate to contact our firm today to review your options with an experienced attorney and staff.