Four situations where Chapter 13 bankruptcy may be a better solution

For four main types of debtors, Chapter 13 is usually a better solution.

If you are struggling with debts you cannot repay, you may be considering bankruptcy as a way out of your financial problems. You may already have heard about Chapter 7 bankruptcy, as it is more often filed than other types. Although there are good reasons why Chapter 7 is more popular, it is not always the best way to address your debts. If you are in four primary situations, Chapter 13 may actually be a better fit for you.

You have significant nonexempt property

If you own property that is not exempt from the Chapter 7 liquidation sale that you would like to keep, Chapter 13 is generally a better choice. During Chapter 13, you do not face the possibility of losing any property. Instead, you can keep your nonexempt property, such as vacation homes, multiple vehicles and luxury items, while you are fulfilling your duties under the repayment plan.

Foreclosure is on the horizon

Like Chapter 7, Chapter 13 immediately halts the foreclosure process as soon as you file it. However, unlike Chapter 7, the relief against foreclosure lasts throughout the entirety of the bankruptcy process. During Chapter 7, if you do not become current on your mortgage in a rather short period, your lender may ask the court to allow the foreclosure process to continue.

However, in Chapter 13, your mortgage arrearages become part of the repayment plan. Under the plan, you make payments towards what you owe over three to five years in monthly installments. During the repayment period, your lender may not restart foreclosure proceedings, provided that you make your payment each month. At the end of bankruptcy, you are caught up on your mortgage and resume making the same mortgage payments as you did before you filed.

You have nondischargeable debts

Bankruptcy cannot discharge every kind of debt. Chapter 13 is no exception. However, Chapter 13 can give you three to five years to catch up on nondischargeable debts such as taxes, student loans, child support and alimony. During the entire Chapter 13 process, you are protected from creditors trying to collect these debts. Because of the protections offered, Chapter 13 is generally better for those that need extra time to repay these debts.

You are struggling with a second mortgage

If you have second mortgage debt that, combined with the debt of your first mortgage, is higher than the market value of your home, Chapter 13 can be very helpful. For Chapter 13 filers, second mortgages that are underwater are treated as unsecured debt. Like most unsecured debts, second mortgages end up being discharged at the end of Chapter 13. Once you are free of this debt, it can free up more resources to devote towards other types of debt under the repayment plan.

Consult an attorney

Even if you fit within these categories, Chapter 13 may not be the right solution for you. As a result, it is vital to seek the advice of an experienced bankruptcy attorney before doing anything. An attorney can examine your situation and recommend the best way to address your unique financial problems.