Chapter 13 is a 3 to 5-year payment plan supervised by the Nebraska bankruptcy court. Chapter 13 does everything a Chapter 7 case does plus more—a lot more. Generally speaking, a person files Chapter 13 when they are somehow disqualified from filing Chapter 7 or they need the special protection offered in Chapter 13.
Chapter 13 Advantages:
- Chapter 13 Stops Foreclosures. Homeowners are allowed to cure an existing mortgage default over the 3 to 5 year payment plan. The homeowner must resume the regular house payment the month after the case is filed, and they are permitted to make an additional payment each month through the bankruptcy trustee to slowly eliminate the mortgage loan default.
- Lien Stripping: If you have a 2nd mortgage and the value of the home is less than the amount owed on the 1st mortgage, a Chapter 13 has the special power to “strip off” the 2nd mortgage debt. At the completion of the bankruptcy case the junior mortgages are simply discharged. Chapter 7 will not strip off a junior lien.
- Cramdown of Auto Loans: Owe more on your vehicle than what is worth? Owe $10,000 on a car that is worth only $5,000? If the vehicle was purchased more than 910 days (about 2 & ½ years) prior to bankruptcy, Chapter 13 allows debtors to pay off only what the car is worth at an interest rate currently set at 5.25%.
- Non-exempt Assets are Protected: Unlike a Chapter 7 case, the trustee in Chapter 13 does not have the power to liquidate unprotected assets. So, if you have too much equity in a home or vehicle, Chapter 13 is the safer choice.
- Tax Debts: Many tax debts cannot be discharged. The chapter 13 payment plan can be used to pay off these taxes so that you emerge from bankruptcy 100% debt free.
- Co-signer Protection: Chapter 13 has special protection for co-signers of consumer debt. Debtors may pay off those debts in full before other debts are paid.
- Ongoing Medial Bills: Although Chapter 13 only discharges those medical debts owed at the time the case is filed, the case may be converted to Chapter 7 at any time and newly incurred medical debts may be added. So, in cases where a debtor lacks health insurance or in cases where there is a chronic medical condition resulting in ongoing medical debt, Chapter 13 may be the better choice until the condition changes.
- Lower Filing Fee: Unlike a Chapter 7 case, attorney fees are typically paid through the Chapter 13 plan so it is less costly to file the Chapter 13 initially. In the long run Chapter 7 is the cheaper way to file, but many debtors simply cannot afford to pay the upfront fees required to file Chapter 7.