First of all, what is Chapter 13? It is a restructuring that allows you the flexibility to repay some or all of your debts over a three-to-five year period.
What types of debts can be restructured in Chapter 13? All types. Home mortgages, car loans, income taxes, property taxes, credit cards, medical bills, installment contracts, equity loans, personal obligations, apartment leases, car leases, the list goes on and on. If you owe it, chances are you can restructure it with Chapter 13.
Why not file for Chapter 7? Isn't Chapter 7 cheaper and easier? In some cases, Chapter 7 might be cheaper and easier. But it also might turn into a complete nightmare. And only an experienced bankruptcy attorney can predict if your “routine” Chapter 7 is really a nightmare in disguise.
Many people don't realize that bankruptcy is not a cookie-cutter process. They say, “My buddy filed for Chapter 7, so that's what I want to do.” But unless you understand the subtle differences between your situation and his, you won't find out that Chapter 7 was a bad choice until it's too late.
Chapter 7 is a one-way ticket. There's no going back. Sure, you can hire the cheapest attorney you can find, and that cut-rate lawyer will tell you, “Chapter 7, no problem, sign here.” But it won't be until after you've filed that you realize you've got a problem. And when that happens, it will be too late. You can't dismiss a Chapter 7. You can't back out because you've changed your mind. You can't cry to the judge because your attorney screwed up. You might not even be able to say, “Okay, I changed my mind, I want to file Chapter 13 after all.” All you can do is stand by and watch while the trustee sells your house and your car to pay your creditors.
Wait a minute? Is the trustee is going to sell your house and car?
Yes, it's a possibility. Chapter 7 is a liquidation. In Chapter 7 a trustee is appointed whose job is to liquidate your assets and pay your creditors. Don't have any assets? Then you're probably safe. But I say “probably” in italics for a reason. Because sometimes trustees find assets that you wouldn't consider to be assets. Did your mom pay your light bill for a few months, and then when you had the cash you paid her back? Guess what? If you're talking $600 or more, the trustee will go after your mom and get that money back from her since it is a preference. Doesn't sound fair? It isn't, but that's Chapter 7 for you. Or maybe you're expecting a large income tax refund when you file for Chapter 7. Think you're going to be able to retain all of it? Think again. In Chapter 7, your trustee might take some or all of it. Or perhaps you put your car in your brother's name to get cheaper insurance. Guess what? The trustee is going to sell the car because under the bankruptcy laws you've committed fraud.
So how can you avoid the potential problems with Chapter 7? It's hard to do. The trustees get paid on commission, so they are always finding new ways to get paid. If you have any doubt, file for Chapter 13.
Chapter 13 is an orderly restructuring. In Chapter 13 you aren't attacked by a greedy trustee whose job is to sell your assets and pay your debts. With Chapter 13 you propose a restructuring whereby you repay some or all of your debt, and in exchange for doing so, you typically retain all of your property. Chapter 13 allows you to remain in control of your life. A trustee is appointed to help you pay your debts. The most common way to fund a Chapter 13 plan is by way of a payroll deduction. The payroll deduction works just like any deduction, be it for child support, health insurance or union dues. Every time you get paid, your employer sends a portion of your paycheck to your trustee. How much? Within reason, that's for you to decide. Can you afford $200 a month? Then that's what you'll pay. $300? $400? Whatever you can afford, that's what you'll pay.
Chapter 13 may sound undesirable at first. But when you stack it up against Chapter 7, weighing the risks against the benefits, more often than not Chapter 13 provides the most direct path to a solid financial future.