Why File a Chapter 13 Bankruptcy Case?


There are many reasons why filing a chapter 13 bankruptcy case may be the best course of action.  Lately the most common reason is because of the mortgage crisis.  Too many homeowners are still struggling with their mortgage payments.  Filing a chapter 13 bankruptcy case will allow a homeowner to catch up on missed mortgage payments by spreading the missed mortgage payments out over the life of the plan of reorganization.  Most plans last sixty months.  Another result of the mortgage crisis was the steep decrease in home values.  The flip side of this unfortunate circumstance is that underwater second mortgages or equity lines of credit can be removed when filing a chapter 13 bankruptcy under the right circumstances.  Make sure you retain a bankruptcy attorney that is familiar with filing a motion to avoid the underwater liens.

Unpaid taxes are another reason to choose to reorganize your debts is to discharge taxes and pay the portion of the taxes that are not dischargeable in the plan.  Whether taxes are dischargeable or not depends upon time.  How much time has passed since the taxes were due, when they were assessed and whether or not you filed the tax return on time.  There are a number factors in determining whether taxes are dischargeable or not that this article does not mention.  Taxes can also be discharged when filing a chapter 7 bankruptcy case too.

Another reason to reorganize your debts is to reduce your car payment.  Chapter 13 can cramdown the amount to pay for the vehicle to its fair market value.  Not the amount you owe at the time the case is filed.  The plan of reorganization can also reduce the percentage rate.  Your vehicle must be purchased at least 910 days prior to the bankruptcy case being filed.  Many car loan companies will object to approval of the plan and try and argues the vehicle is worth more than the vehicle actually is.  If you cramdown a vehicle loan to the fair market value expect to hear from the car loan company.

In 2005 the bankruptcy code was amended to create what is called the Means Test.  The Means Test was designed to determine if you have disposable income available to unsecured creditors.  It is far from perfect and uses local standards for some expenses and national standards for other expenses.  This is an attempt to create a cookie cutter approach to push high income bankruptcy filers into repaying some of their debt in the plan of reorganization.  The Means Test has made filing bankruptcy more complicated and retaining an experienced bankruptcy lawyer that is very familiar with what is allowed in your jurisdiction and not allowed by the chapter 13 trustee’s office is very important.  All chapter 13 trustee’s administer chapter 13 bankruptcy cases differently.

There are many other reasons to file a chapter 13 bankruptcy that are not mentioned in this article.  It all depends upon your income, expenses and assets.