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A Chapter 13 is a “payment plan” bankruptcy that usually lasts from 3 to 5 years.  Chapter 13 is often used when a debtor can’t qualify for a Chapter 7 because they make too much money.  Chapter 13 is also used when a debtor has non-exempt property that they don’t want to risk having a trustee liquidate in a Chapter 7 case.  Depending on the situation, a debtor in a Chapter 13 case might have to formulate a plan that pays unsecured creditors anywhere from 0% to 100%.  The goal of the attorney is usually to try to keep that distribution to unsecured creditors as low as possible. 


However, the main reason to prefer a Chapter 13 over a Chapter 7 are the powerful tools available under that chapter, such as:

  1. Save a house from foreclosure.  Many people who have fallen behind on their mortgage payments due to temporary loss of work can use a Chapter 13 to help pay catch-up.  For instance, if my mortgage payment was $2,000 per month but I was 5 months ($10,000) behind and the lender was starting to foreclose, I could propose paying down the $10,000 over a 5 year period as long as I could stay current on the regular mortgage payment as well. 

  2. Pay recent taxes.  Let’s say I owe $20,000 from the last couple of years to the IRS.  I can pay the $20,000 over the course of a 5 year payment plan.  This often works well to the debtor because taxes are usually “priority” and needs to get paid first in a bankruptcy.  I can often keep the tax creditor at bay and ultimately get a discharge of my credit card debt.

  3. “Strip off” underwater mortgage loans.  This is one of the great advantages of a Chapter 13.  I can “avoid” the underwater lien and ultimately get a judgment that it is of no force or effect.  No more second mortgage or home equity line of credit! 

  4. “Cram down” a car loan.  We call this a “cram down” but it is really just adjusting the secured portion of a car loan down to the car’s value.  If I have a $30,000 loan and a $15,000 car, I can usually cram the loan down to the value of the car and pay off the lower loan amount at about 5 percent interest.  The ability to do this depends on the age of the loan or whether the loan was for the purchase of the car (or was partially used to pay off old loans, a car refinance, etc.).

  5. Pay 100% of a co-signed consumer debt at a higher priority than ordinary unsecured.  This often permits a parent co-signed student loan to be paid in full during a Chapter 13 case.

  6. Defer payment on non-dischargeable student loans. Finally, student loan debt is onerous and can be managed in a Chapter 13 bankruptcy case.  This is particularly so for medium income earners at the early part of their careers who can’t afford to pay their student loans and still having a reasonable lifestyle.  A Chapter 13 permits student loans to be deferred for the entire period of the Chapter 13 case. 


There are many benefits available in a Chapter 13.  Everything is dependent on the circumstances of the individual and you should talk to an experienced San Francisco Bankruptcy Attorney about your particular situation.

By: Marty Courson

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