The national trends of bankruptcy filing reveal that approximately 65% of the time people file for Chapter 7 bankruptcy. And Chapter 7 bankruptcy undoubtedly has several advantages. Some of the most prominent advantages are that Chapter 7 typically takes less than six months and there are no long term commitments. However, that is not to say that filing for Chapter 7 is always the best solution. There are several advantages to filing for Chapter 13 bankruptcy. Regardless of the comparative advantages, you might not have the option of filing for Chapter 7 bankruptcy.
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One reason for filing under Chapter 13 is the law might not afford you an option. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 uses the "means test" to determine if you make too much money to file for Chapter 7 bankruptcy. For example, as of March 15, 2010, the median income for a family of four living in Kansas is $72,352. If you make more than the median income, there is a presumption against allowing you to file under Chapter 7. You will have to file a Chapter 13 bankruptcy if: (1) your income exceeds the median income; and (2) your disposable income allows you to pay your unsecured creditors at least $10,950 over the course of five years. However, that is not necessarily a bad thing. Chapter 13 offers several powerful advantages, and it might be to your advantage to file for Chapter 13 bankruptcy even if you can qualify for Chapter 7 bankruptcy. Below are some of the advantages to filing for Chapter 13 bankruptcy.
Advantage 1: Stop Foreclosure and Repossession
Both Chapter 7 and Chapter 13 initially stop a foreclosure or repossession via the automatic stay. However, Chapter 7 only temporarily stops a foreclosure whereas Chapter 13 gives you the option of catching up on your late payments via a five year repayment plan. At the heart of a Chapter 13 bankruptcy is a three- or five-year repayment plan that allows you catch up on your missed payments. You can pay your missed payments back over the length of your repayment plan while keeping your house. And as long as you stay current with your payment plan, you will be able to keep your house.
Advantage 2: Lose the Second Mortgage
In this crazy economy, lots of people find themselves in the unenviable position of being "upside down" on their home. If your home is worth less, or equal to what you owe on your first mortgage, filing for Chapter 13 can change your second mortgage into an unsecured debt. This is an important distinction because as an unsecured creditor you will not have to repay the full amount you owe on your second mortgage. In some cases, people literally pay pennies on the dollar toward their second mortgage. This bears a two-fold advantage for you. First, it will lower the amount you are paying on your house. Second, your second mortgage will be discharged if you complete your repayment plan.
Advantage 3: Cram Down
The cram down option can be really useful if you are "upside down" on a car that you purchased more than 910 days before you filed for Chapter 13. Assuming your car loan qualifies, and you are "upside down" on your loan, you can force your creditor to reduce the amount you owe to your car's current value. In essence, you will propose to pay your car's current value over the course of your Chapter 13 repayment plan versus what you presently owe. This option alone can save you thousands of dollars.
Advantage 4: Reduce Interest on Your Secured Loans
Chapter 13 allows you to reduce the interest rates you pay on your secured loans. The one exception to this is you are not allowed to lower the interest rate on your mortgage. For example, if you are paying an interest rate of 20% on a loan for your home furniture, filing for Chapter 13 allows you to slash your rate to the prime rate plus 1-3%, depending on your case. This can result in you saving a lot of money.
Advantage 5: Buy Yourself Time to Pay Off A Non-Dischargeable Loan.
Unfortunately, some debt cannot be discharged and survive bankruptcy. For instance, student loans and tax obligations cannot be discharged. However, filing for Chapter 13 bankruptcy gives you the five year repayment period to pay back the loan.
Advantage 6: Protect Nonexempt Property That Is Not Protected Under Chapter 7.
Chapter 13 allows you to keep all of your property. If you file for Chapter 7, some of your property is not exempt from the bankruptcy trustee. In other words, if you file for Chapter 7, the bankruptcy trustee can take your nonexempt property and sell it in order to satisfy your debt. For instance, if you have a prize collection of baseball cards, or a piece of nonexempt real estate, the bankruptcy trustee can take that property and sell it if you file for Chapter 7. But if you file for Chapter 13 bankruptcy, you can keep your nonexempt property.
Determining whether you should file for bankruptcy is an important decision. Deciding between filing for Chapter 7 and Chapter 13 can be even more complicated. Make sure you consult with a bankruptcy attorney before you make this important decision.
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