Why in the World Would You Use Chapter 13 Bankruptcy Instead of Chapter 7?

When most people think of bankruptcy they think of filing Chapter 7 bankruptcy. Until recently, most Americans didn't understand what a Chapter 13 bankruptcy did. Chapter 7 bankruptcy is known as a liquidation Chapter of bankruptcy. In a Chapter 7, all of the property of the individual filing becomes part of the bankruptcy estate. The bankruptcy attorney for the individual filing would apply bankruptcy exemptions to protect as much property as possible. Any property that wasn't protected by bankruptcy exemptions would be up for grabs by the bankruptcy trustee. This is why Chapter 7 bankruptcy is known as a liquidation Chapter even though rarely does someone filing chapter 7 ever get liquidated.

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In 2005, the bankruptcy code was amended because Congress believed that too many individuals were abusing the bankruptcy system. They felt that many Americans that were filing Chapter 7 bankruptcy were capable of paying back at least a portion of their debt in a Chapter 13. This is why they added the means test to qualify someone to file Chapter 7. The means test took the last six months of household income of the individual filing, divided it by six and multiplied it by 12 to give an annual average household income to compare against the median income chart for their state. Added to this was an income and expense report, where the individual would need to report all of their household expenses that would be deducted from the income. If the person had more than $170 of disposable income each month, they believe the person should be filing Chapter 13 bankruptcy instead.

Where the benefits of Chapter 13 bankruptcy showed up was after the real estate meltdown of 2007. Piles of bad loans caused many Americans to face foreclosure on their homes. A few bankruptcy attorneys look for solutions to protect homes from foreclosure. After a few cases challenged in court, it became apparent that Chapter 13 bankruptcy would be a solution to stop foreclosure as the loan modification program the government came up with was not working. In a Chapter 13 bankruptcy, the individual and their bankruptcy attorney are required to come up with a feasible repayment plan and submit it to the bankruptcy court. Since debts are paid by priority, with secured debts getting top billing and the unsecured getting whatever's left over, it became clear that a person can continue paying their mortgage and get caught up on any back payments over the Chapter 13 plan. Another benefit that showed up was the ability to remove the lien of a second or third trust deed. The bankruptcy attorney would file a motion with the court to remove these liens and make the debt unsecured if the value of the property had dropped below the amount owed on the first trust deed. Many Americans fit into this category and should consider filing Chapter 13 if they are still employed and just become over encumbered.

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