To get rid of your debts, you can file for bankruptcy under Chapter 7 or chapter 13. Once your bankruptcy chapter is complete, you can get a discharge order from the bankruptcy court, eliminating the filer’s obligation to pay their debts. Chapter 7 requires you to pass the Means Test and have a low disposable income; otherwise, you can file for chapter 13 bankruptcy. In the latter case, you are required to pay your creditors through a 3- to 5-year repayment plan, using your disposable income. You can use bankruptcy exemptions to protect some amount of property. The bankruptcy filing puts an automatic stay in place, preventing creditors from pursuing any collection action against you.
What are the advantages of filing for Chapter 13 bankruptcy?
Compared to Chapter 7, Chapter 13 bankruptcy offers several other advantages, including stripping a second mortgage from your property and cram down a car loan. Chapter 13 also allows filers to discharge debts they would be enabled to discharge in a Chapter 7 bankruptcy filing. These include homeowner association fees (HOA) received after bankruptcy filing, fines and penalties like traffic and parking tickets, divorce property settlement unrelated to domestic support obligations, and personal loans taken to pay off nondischargeable debts.
Which debts survive bankruptcy discharge?
Some debts cannot be discharged irrespective of the chapter of bankruptcy you file. However, chapter 13 still presents some advantages in these cases. While child support obligations cannot be eliminated through a bankruptcy filing, you can catch up on past due payments through your Chapter 13 repayment plan. You need to keep your current monthly payments up to date to avoid being taken to court.
Similarly, though student loans cannot be discharged, you can reduce the monthly payments to the lender due to your chapter 13 bankruptcy. You can also delay making payments till you receive the bankruptcy discharge. Unfortunately, the interest will continue to pile up in the latter case.
While recent income taxes cannot be discharged, chapter 13 can help you provide additional time to make the payments. This can be helpful if you cannot reach an agreement with the IRS and the taxes are due immediately. You can use the chapter 13 repayment plan to pay the IRS an affordable amount to clear your taxes. Moreover, the automatic stay will prevent the collection of taxes due to any lawsuit filed by the government. The co-signer is also protected from the collection due to the automatic stay for the duration of the repayment plan.
Usually, a chapter 13 plan lasts for around 3- to 5-years. However, in special circumstances, discharge can be received before the completion of the plan. This is known as hardship discharge. This occurs when circumstances turn adverse, making it difficult for you to complete the bankruptcy plan. For example, prolonged illness, job loss, permanent disability, death of a family member who contributed to the bankruptcy plan, decrease in monthly income are some of the circumstances which are “beyond your control” and can help you qualify for a hardship discharge.
While requesting for a hardship discharge, the creditors must receive an amount they would have received in Chapter 7 bankruptcy discharge. If a repayment plan change is possible, you cannot qualify for a hardship discharge. Another option available is to convert to a Chapter 7 bankruptcy. Hardship discharge lets you get rid of debts that would have been included and discharged in Chapter 7 bankruptcy.