Chapter 7 is a fast process that results in the discharge of unsecured debts. Common unsecured debts are credit card, personal loans, medical bills, and deficiencies on repossessed cars. Chapter 7 doesn’t discharge secured debt (mortgages or car loans), but you have the option of surrendering the house or car to get rid of the debt.
Chapter 7 isn’t for everyone. One reason is that if you’re behind on mortgage or car payments and are facing foreclosure or repossession, Chapter 7 can’t help you there. At the end of a Chapter 7 case, your credit card debt will be gone, but you’ll probably still be behind on those secured debt payments, and the threat of foreclosure or repossession will still be there.
This is where Chapter 13 steps in. Chapter 13 gives you the Court’s protection from debt collection actions for the duration of your Chapter 13 Plan (usually five years). Since you’re not paying off unsecured debt, you can afford to start making your mortgage or car payments again. And the amounts you’re behind get paid off through your Plan.
Another reason why Chapter 7 might not be right for you is that some kinds of unsecured debt are not dischargeable. Those include most income taxes, student loans, and spousal or child support. However, just because these debts aren’t dischargeable, doesn’t mean the Court can’t help you address them in a Chapter 13 case.
For tax debt, if the IRS is threatening a tax lien or won’t agree to a reasonable payment plan, you can pay them back through a Chapter 13 Plan over five years and at a relatively low interest rate, and they will have to accept it.
For spousal or child support, you will have to pay the full amount you are behind during the course of you Chapter 13 Plan and keep current with your ongoing payments. However, as long as you do so, the Court protects your wages from being garnished.
As to student loans, Chapter 13 can provide a five-year “cushion” during which the lender will have to accept whatever amount you can afford, paid through your Plan. The full loan will still be owed at the conclusion of your case (with interest), but you will have had that five-year breather to deal with your other financial issues.
Bankruptcy law provides many amazing tools for dealing with all kinds of debt, and this description barely scratches the surface. If you’re having paying your bills or dealing with your debt, please contact me for a free initial consultation to see how the law can help you.