Many debtors choose not to file for Chapter 13 bankruptcy because it requires repayment of at least a portion of their debts (unlike Chapter 7 bankruptcy, which wipes out many debts entirely ).

In some situations, however, Chapter 13 bankruptcy is the better bankruptcy option. Not only that, but certain debtors don’t get to choose: Not everyone is eligible for Chapter 7 bankruptcy, so Chapter 13 will by the only option available to some filers.

Here are some good reasons to file for Chapter 13:

You cannot file for Chapter 7. You won’t be allowed to file for Chapter 7 if you cannot meet some new requirements imposed by the 2005 revisions to the bankruptcy law. Under these new rules, you cannot file for Chapter 7 if both of the following are true:

• Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state (go to the website of the United States Trustee,www.usdoj.gov/ust, and click “Means Testing Information” to see the median figures for your state).
• Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the “means test” — if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy. (For more information, including a link to an online calculator you can use to see whether you pass the means test, seeThe Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?)

The means test can get fairly complex — and, to make matter worse, Congress has its own definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms, which sometimes operate to make your income seem higher than it actually is. You can find step-by-step instructions to determine if you qualify for Chapter 7 under these new rules in How to File for Chapter 7 Bankruptcy, by attorney Stephen Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).

In addition, if you have received a Chapter 7 bankruptcy discharge within the last eight years, or a Chapter 13 discharge within the last six years, you may not file for Chapter 7 bankruptcy.

You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time.

You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. This might be the case if creditors are coming after you, or if you simply require the formal structure and deadlines the Chapter 13 process provides in order to follow through on your good intentions.

You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only exempt property — property that is protected from creditors under state or federal law. You have to give your nonexempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors.

In Chapter 13, you don’t have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can’t bear to part with, Chapter 13 might be the better choice.

You have a codebtor on a personal debt. If you file for Chapter 7 bankruptcy, your codebtor will still be on the hook — and your creditor will undoubtedly go after the codebtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone, as long as you keep up with your bankruptcy plan payments.

For more help deciding which bankruptcy is right for you, see The New Bankruptcy: Will It Work for You?, by attorney Stephen Elias (Nolo). Or, for help filing Chapter 13, see Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen Elias and Robin Leonard, J.D. (Nolo).

Chapter 13 bankruptcy, sometimes called reorganization bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most of your debts are wiped out; in exchange, you must relinquish any property that isn’t exempt from seizure by your creditors. In a Chapter 13 bankruptcy, you don’t have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time — from three to five years, depending on the size of your debts and income.

Chapter 13 Eligibility

Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill) doesn’t give the creditor this right.

The Chapter 13 Process

Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee’s office. (For a list of approved agencies, go to the Trustee’s website at www.usdoj.gov/ust and click “Credit Counseling and Debtor Education.”) These agencies are allowed to charge a fee for their services, but they must provide counseling for free or at reduced rates if you cannot afford to pay.

In addition, you’ll have to pay the filing fee, which is currently $274, and file numerous forms. For line-by-line instructions on filling out the required bankruptcy forms, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

The Chapter 13 Repayment Plan

The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how (and how much) you will pay each of your debts. There is no official form for the plan, but many courts have designed their own forms.

How Much You Must Pay

Your Chapter 13 plan must pay certain debts in full. These debts are called “priority debts,” because they’re considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.

In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you’ve fallen behind in your payments).

The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don’t have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.

How Long Your Repayment Plan Will Last

The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is more than the median income for your state, you’ll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee’s website,www.usdoj.gov/ust, and click “Means Testing Information.”)

No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.

If You Can’t Make Plan Payments

If for some reason you cannot finish a Chapter 13 repayment plan — for example, you lose your job six months into the plan and can’t keep up the payments — the bankruptcy trustee may modify your plan, or the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness.

If the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you might be able to convert to a Chapter 7 bankruptcy or ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case (you would still owe your debts, plus any interest creditors did not charge while your Chapter 13 case was pending). For information on your alternatives in this situation, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

How a Chapter 13 Case Ends

Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations and that you have completed a budget counseling course with an agency approved by the United States Trustee. (This requirement is separate from the mandatory credit counseling you must undergo before filing for bankruptcy — you can find a list of approved agencies at the Trustee’s website, www.usdoj.gov/ust; click “Credit Counseling and Debtor Education.”)

For more information, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

The “means test” is a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. High income filers who fail the means test may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn’t mean that you must be penniless in order to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment. This article shows you simple ways to determine whether you can pass the means test — and, therefore, use Chapter 7 — if you were to file for bankruptcy.

How Does the Chapter 7 Means Test Work?

The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can’t pay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy.

To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.

Is Your Income More Than the Median?

The first step is simple: If your current monthly income is less than the median income for a household of your size in for your state, you pass. Period. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.

Do You Have Enough Disposable Income to Repay Some Debts?

For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called “disposable income”), after paying your “allowed” monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.

Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation. But don’t worry: You can get through the math with the help of an online calculator.

Use a Chapter 7 Means Test Online Calculator

If you’re looking for an easy way to determine your eligibility under the Chapter 7 means test, use our online means test calculator, created by the author of Nolo’s book How to File for Chapter 7 Bankruptcy, Albin Renauer, J.D. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.

You’ll have to supply some income and expense information, but the calculator will save you the trouble of looking up income and expense figures for your area and doing the math. And, if you decide to file for Chapter7 bankruptcy, you can use these figures on your official paperwork (the calculator closely follows the format of the means test form, Official Form 22A, that you must complete when you file for bankruptcy).

If You Pass the Chapter 7 Means Test

Just because you qualify under the means test does not necessarily mean you should file for Chapter 7 bankruptcy — merely that you can. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors discussed in other articles on this website or in Nolo’s The New Bankruptcy: Will It Work for You?, by Attorney Stephen Elias.

Once you’ve made your decision to go ahead and file for Chapter 7 bankruptcy, Nolo’s book How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard, can walk you step by step through the filing process.

If You Don’t Pass the Chapter 7 Means Test

If you don’t pass the means test, you are limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like curing a default on a mortgage. (SeeReasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy.)

For help filing a Chapter 13 bankruptcy, see Nolo’s Chapter 13 Bankruptcy: Repay Your Debts, by Stephen Elias and Robin Leonard.

Filing for Chapter 7 bankruptcy can be a powerful tool for dealing with overwhelming debt. But it isn’t available to everyone. There are several situations in which you won’t be allowed to file Chapter 7 bankruptcy.

You Have Enough Income to Repay Your Debts

Under the old bankruptcy rules, the bankruptcy judge had the power to dismiss a Chapter 7 bankruptcy case if he or she thought the debtor had sufficient disposable income to fund a Chapter 13 repayment plan. There were no hard and fast rules dictating when a judge should dismiss a case on these grounds — it depended on the facts of the case and the attitude of the judge.

Now that the new bankruptcy law has gone into effect, however, there are clear criteria that dictate who will be allowed to stay in Chapter 7 bankruptcy — and who will be forced to use Chapter 13 bankruptcy if they want to file. Disabled veterans whose debts were incurred during active duty and people whose debts come primarily from the operation of a business get a fast pass to Chapter 7 bankruptcy. All others must meet the requirements set out below.

How High is Your Income?

Under the new rules, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your “current monthly income” against the median income for a family of your size in your state. Your “current monthly income” is your average income over the last six months before you file. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy.

If your income is more than the median, however, you must pass “the means test” — another requirement of the new law — in order to file for Chapter 7 bankruptcy.

Do You Have Enough Disposable Income to Repay Some Debts?

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period.

For much more information on these new requirements, including detailed worksheets that will help you figure out whether you can use Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy, by Attorneys Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).

You Previously Received a Bankruptcy Discharge

You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts in a Chapter 7 bankruptcy case within the last eight years, or a Chapter 13 case within the last six years.

A Previous Bankruptcy Was Dismissed Within the Previous 180 Days

You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

• you violated a court order
• the court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or
• you requested the dismissal after a creditor asked for relief from the automatic stay.

You Defrauded Your Creditors

A bankruptcy court may dismiss your case if it thinks you have tried to cheat your creditors or concealed assets so you can keep them for yourself.

Certain activities are red flags to the courts and trustees. If you have engaged in any of them during the past year, your bankruptcy case may be dismissed. These no-nos include:

• unloading assets to your friends or relatives to hide them from creditors or from the bankruptcy court
• running up debts for luxury items when you were clearly broke and had no way to pay them off
• concealing property or money from your spouse during a divorce proceeding, or
• lying about your income or debts on a credit application.

In addition, you must sign your bankruptcy papers under “penalty of perjury” swearing that everything in them is true. If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number (to hide your identity as a prior filer), and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud.

You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. But it’s not as simple as it sounds. Most tax debts can’t be wiped out in bankruptcy — you’ll continue to owe them at the end of a Chapter 7 bankruptcy case, or you’ll have to repay them in full in a Chapter 13 bankruptcy repayment plan.

If you need to discharge tax debts, Chapter 7 bankruptcy will probably be the better option — but only if your debts qualify for discharge (see below) and you are eligible for Chapter 7 bankruptcy.

When You Can Discharge a Tax Debt

You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

• The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
• You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
• The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
• You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
• You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

You Can’t Discharge a Federal Tax Lien

If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the property. In effect, this means you’ll have to pay off the tax lien in order to sell the property.

For More Information

To find out more about which debts you can eliminate in bankruptcy, see The New Bankruptcy: Will It Work for You?, by attorney Stephen Elias (Nolo).

When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Especially if you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, or losing such basic resources as utility services, welfare, unemployment benefits, or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason to file for bankruptcy.

What the Automatic Stay Can Prevent

Here is how the automatic stay affects some common emergencies:

• Utility disconnections. If you’re behind on a utility bill and the company is threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in January in New England might be justification enough.
• Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
• Eviction. If you are being evicted from your home, the automatic stay may provide some help — but the new bankruptcy law makes it easier for landlords to proceed with evictions. If your landlord already has a judgment of possession against you when you file, the automatic stay won’t affect these eviction proceedings; the landlord can continue just as if you hadn’t filed for bankruptcy. And if the landlord alleges that you’ve been endangering the property or using controlled substances there, the automatic stay won’t do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction — and the court will probably agree to do so.
• Collection of overpayments of public benefits. If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents this collection. However, if you become ineligible for benefits, the automatic stay doesn’t prevent the agency from denying or terminating benefits for that reason.
• Multiple wage garnishments. Filing for bankruptcy stops garnishments dead in their tracks. (And not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy.) Although no more than 25% of your wages may be taken to satisfy court judgments (up to 50% for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened.

What the Automatic Stay Cannot Prevent

In a few instances, the automatic stay won’t help you.

• Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.
• Support actions. A lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn’t stopped by your filing for bankruptcy.
• Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component won’t be stopped by the automatic stay. For example, if you were convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service won’t be stopped by your filing for bankruptcy.
• Loans from a pension. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRAs).
• Multiple filings. If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue and proves that the current case was filed in good faith. If a creditor had a motion to lift the stay pending during the previous case, the court will presume that you acted in bad faith, and you’ll have to overcome this presumption to get the protection of the stay in your current case.

How Creditors Can Get Around the Automatic Stay

Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove (“lift”) the stay, if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can’t pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to go to court soon after you file for bankruptcy and ask for permission to proceed with the foreclosure — and that permission is likely to be granted.

For More Information

For more information on the automatic stay and how it might apply in your situation, see

The New Bankruptcy: Will It Work for You?, by attorney Stephen Elias

Bankruptcy is good at wiping out credit card debt, but you may have trouble eliminating some other kinds of debts, including child support, alimony, most tax debts, student loans, and secured debts.

What Bankruptcy Can Do

If you are facing serious debt problems, bankruptcy may offer a powerful remedy. Here are some of the things filing for bankruptcy can do:

Wipe out credit card debt and other unsecured debts. Bankruptcy is very good at wiping out credit card debt. Unless you have a special “secured” credit card, your credit card balance is an unsecured debt — that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. This is precisely the kind of debt that bankruptcy is designed to eliminate. Besides credit card debt, you may have other unsecured debts, and bankruptcy can wipe these out as well.

If you file for Chapter 13 rather than Chapter 7, you may have to pay back some portion of your unsecured debts. However, any unsecured debts that remain once your repayment plan is complete will be discharged.

Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the “harassment”‘ is simply phone calls and letters, there are simpler ways to stop it; . If the harassment is more serious — for instance, if the creditor is about to repossess your car or foreclose your mortgage — bankruptcy can help;.

Eliminate certain kinds of liens. A lien is a creditor’s right to take some or all of your property and will survive bankruptcy unless you invoke certain procedures during your bankruptcy case. For more information, see How to File for Chapter 7 Bankruptcy, by attorney Stephen Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).

What Bankruptcy Can’t Do

Here’s what bankruptcy cannot do for you:

Prevent a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. So, if you have a secured debt (a debt where the creditor has a lien on your property and can repossess it if you don’t pay the debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property.

Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy — you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, your plan will have to provide for these debts to be repaid in full.

Wipe out student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you “undue hardship,” a very tough standard to meet. You must be able to show not only that you cannot afford to pay your loans now, but also that you have very little likelihood of being able to pay your loans in the future.

Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is sometimes possible for older debts for unpaid income taxes. There are many requirements to be met, however.

Eliminate other nondischargeable debts. The following debts are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy:

• debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
• debts for personal injury or death caused by your intoxicated driving, and
• fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution.

If you file for Chapter 7, these debts will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your repayment plan. If they are not repaid in full, the balance will remain at the end of your case.

In addition, some types of debts may not be discharged if the creditor convinces the judge that they should survive your bankruptcy. These include debts incurred through fraud, such as lying on a credit application or passing off borrowed property as your own to use as collateral for a loan.

What Only Chapter 13 Bankruptcy Can Do

Chapter 7 can’t help you with these situations, but Chapter 13 can:

Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan where you make up the missed payments over time while staying current on your regular monthly payments. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.

Allow you to keep nonexempt property. You don’t have to give up any property in Chapter 13 because you use your income to fund your repayment plan.

“Cram down” secured debts that are worth more than the property that secures them. You can sometimes use Chapter 13 to reduce a debt to the replacement value of the property securing it, then pay off that debt through your plan. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and have the rest of the loan discharged. However, under the new bankruptcy law, you can’t cram down a car debt if you purchased the car during the 30-month period before you filed for bankruptcy. For other types of personal property, you can’t cram down a secured debt if you purchased the property within one year of filing for bankruptcy.

For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen Elias and Robin Leonard, J.D. (Nolo).