Many people find themselves overwhelmed by debt. Unexpected medical expenses, rapidly rising credit card payments, a reduction in income, rent increases, car repairs, lawsuits, unaffordable balloon payments, a new baby … the list of reasons people find themselves with unmanageable debt is endless.
There are different ways of dealing with a debt crisis. No single solution is right for everyone. For some people, debt renegotiation or loan modifications are possible. For others, a chapter 7 bankruptcy is the answer. For many people, a chapter 13 bankruptcy is the right choice.
An Option When Chapter 7 is Unavailable
Not every debtor can liquidate debts in a chapter 7 bankruptcy. The Bankruptcy Code creates a “means test.” If your average monthly income is higher than the median income in your state, you might not be eligible to file under chapter 7. Chapter 13 provides an alternative for debtors with a regular monthly income who do not qualify for a chapter 7 bankruptcy.
Managing Nondischargeable Debts
Not all debts can be discharged in a chapter 7 bankruptcy. Student loan debt, most taxes, fines and penalties owed to the government, alimony and child support, and damage judgments in lawsuits for intentional conduct and drunk driving are among the kinds of debt that you cannot discharge. Including those debts in a chapter 13 plan allows you to take advantage of the automatic stay to avoid collection efforts and harassment by your creditors while the plan remains in effect. The debts will not be discharged at the end of the chapter 13 plan, but the plan give you an opportunity to make up missed payments and to pay off arrearages during the years that the plan remains in effect.
Avoiding Foreclosure or Repossession
If you have secured debts, including a home loan that is secured by a mortgage or a car loan that gives your lender a lien on your vehicle, your creditor may eventually be entitled to pursue foreclosure or repossession if you file a chapter 7 bankruptcy. A chapter 13 plan gives you the chance to catch up on missing payments. While the plan remains in effect, you can continue living in your house and driving your car. If you can bring your payments up to date by the time the plan ends, you avoid foreclosure and repossession.
Sometimes a borrower has a friend or relative cosign a loan. If the borrower files a chapter 7 bankruptcy, the cosigner can be held responsible for paying the balance of the loan. Including that loan in a chapter 13 plan prevents the creditor from pursuing your cosigner for payment.
The Satisfaction of Repaying Debt
Some people worry about the stigma of discharging debt in a chapter 7, or they just don’t feel good about themselves if they don’t pay their debts. If you owe debts to friends or family members, to an employer, or to businesses that you depend upon, you might worry that your relationship will be damaged if you fail to pay your debt. Filing a chapter 13 gives you the benefit of knowing that you made your best effort to repay everyone to whom you owed money, particularly the people you care about.
Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.