When to Consider Chapter 13 Bankruptcy
If you find that any of the following situations apply to you, then Chapter 13 bankruptcy might be beneficial:
- You earn too much to qualify for Chapter 7
- You need to prevent your home from being foreclosed
- You have assets that are not exempt and you want to protect them from being sold off in Chapter 7
- You have debts to pay off, such as car loans or tax debts, but you need more time to do so
Chapter 13 bankruptcy is also known as reorganization bankruptcy, debt adjustment, or a wage earner’s plan. If you have a steady income but have accumulated more debt than you can handle, Chapter 13 allows you to create a plan to pay off your creditors over a period of three to five years. In this plan, you can adjust your debts to an affordable amount, and some debts might not need to be repaid at all. Your creditors are legally obligated to accept the terms of the plan, and they are prohibited from pursuing any collection activities (such as wage garnishment, bank levy, liens, repossession, foreclosure, etc.) while the plan is in effect.
Discover How a Chapter 13 Can Rescue Your Home from Foreclosure
If you miss your monthly mortgage payment, you could be placed in default. After receiving a notice of default from the lender, you have 90 days to make up all missed payments before the bank can schedule a foreclosure sale of your home, which could lead to eviction.
Filing for Chapter 13 bankruptcy can protect you from foreclosure. When you file for Chapter 13, the “automatic stay” provision goes into effect, telling your creditors to stop all collection activities, including foreclosures.
With the automatic stay in place, you have time to create a plan to reorganize your debts and make them more manageable. Your past due mortgage payments can be included in your Chapter 13 plan and paid off over a three-year or six-year period, depending on your means. Your creditors cannot pursue collection efforts outside of the bankruptcy, as long as you comply with your plan.
Chapter 13 can also help adjust your mortgage to prevent foreclosure. During the reorganization process, it's possible to lower your mortgage payments through a loan modification approved by your lender. Additionally, if you have a second mortgage and your home's value is lower than what you owe on the first mortgage, the junior lien can be treated as an unsecured debt and may require little or no payments to get rid of that debt.