Chapter 13 Gives You Lots More Time to Pay Crucial Creditors
April 3, 2017
When you’d like to favor certain important debts over others, often Chapter 13 makes this possible.
Using the Bankruptcy Laws to Your Advantage
One of the basic principles of bankruptcy is that you usually can’t favor one debt over your other debts. You can’t except when the law favors that debt for some reason. In various ways, creditors are recognized to be legally different. For example, secured creditors have rights over your property that you’ve given as collateral, rights that unsecured creditors don’t have. Also, bankruptcy does not discharge (write off) certain debts. These include child support, many types of taxes and many student loans, and certain other debts. These can’t be discharged while most debts can.
One of the huge benefits of Chapter 13 is that it turns to your advantage the ways that the law requires you to treat debts differently.
Here are two good examples.
Catching up on Your Mortgage Arrearage
The law highly favors residential mortgage debts, especially your primary mortgage. Why? The idea is that these lenders should be protected in bankruptcy to lessen their risks. Arguably this encourages more investment in the residential mortgage capital markets, to make mortgages more readily available to homeowners.
So, if you were behind on your home mortgage and wanted to keep the home, you’d have to catch up. You can’t escape doing so just because the home is worth less than the debt (as you often can with a vehicle loan). You would have to catch up whether you filed a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts.”
The difference is that in a Chapter 7 case you would have a limited time to catch up. You would usually have much more time in a Chapter 13 case. That means that your monthly catch-up payments would almost always be less. Also, because in a Chapter 13 payment plan you are usually only required to pay what you can afford, this means that catching up on your mortgage is fit within paying any other important debts that you have to pay (such as income taxes and/or child support.)
If your home is one of your highest priorities, and you are behind on the mortgage payments, then consider using Chapter 13 to catch up.
Child Support Arrearage
Another kind of debt that is highly favored in the law is child support. As a result, if you get behind on support payments, the collection procedures that can be used against you are extremely aggressive. There’s the usual potential garnishment of your bank accounts and paychecks. But In most states you also face the possibility of losing your driver’s license. There’s also the possibility that your occupational or professional license could be taken from you.
Chapter 7 provides no direct help if you owe back support. The “automatic stay” that protects you from other creditors does not even apply to support debt under Chapter 7. This means that the aggressive collections can just continue; the bankruptcy filing has no effect on it.
But a Chapter 13 is very different. The “automatic stay” does protect you and your property from collection of the support arrearage. You ARE protected from support collections, as long as you follow some strict rules. After the Chapter 13 filing you must pay ongoing regular support payments, and your Chapter 13 plan payments. Through those plan payments, you have to pay off the entire support arrearage before completing the case. But you want to pay it off because you don’t want to be current when you finish the case and lose the protection it provides.
In a Chapter 13 case, you essentially take money away from your other creditors to pay off the support arrearage. Often your support arrearage is paid 100% before you pay anything to the rest of your unsecured creditors.