Chapter 13 Bankruptcy in Arizona. We have helped a few hundred clients over the years navigate one. They are strange creatures and require a good understanding of basic bankruptcy ideas in order to fully grasp how they work.
The most common question I get about them other than what it is?… “why would a person want to file one IF he already qualifies to file what should be a simpler chapter 7 case”.
In my opinion, here are the five most common reasons why a person would want to consider a chapter 13 bankruptcy if he already qualifies to file a chapter 7 case.
If his home is being foreclosed upon, and he thinks that he can afford the underlying payment and basic living expenses AND if he can’t work anything out with the bank, a chapter 13 bankruptcy will stop the foreclosure process and allow him time to spread the arrears out over 3-5 years.
2. Tax Debt – Chapter 13 payment plan better than IRS payment plan
The IRS may have rejected an offer in compromise. It may be trying to force a payment plan that is just too big considering an actual budget.
In a chapter 13 bankruptcy, a payment plan can be “forced” on the IRS in regards to the non-dischargeable tax debt and the payment may be friendlier than the one the IRS wants.
The chapter 13 will also allow for the treatment of civil penalties on income tax debt as dischargeable i.e. it is possible that the IRS would receive little or nothing on the penalty portion of the debt and the interest that goes along with it.
3. Get rid of your second mortgage
His home is upside down and is worth less than he owes on the first mortgage. A chapter 13 should allow him to treat the second mortgage as unsecured and “strip” it off the home.
4. Cram down other property to it’s market value
He may own a car that is worth much less than he owes on it and/or that has a very large interest rate attached to it. In a Chapter 13 case, he may be able to pay only the value of the car at a reduced rate and treat the remainder of the debt as unsecured.
5. You have an asset that you just don’t want to lose or sell
Sometimes people qualify for a chapter 7 bankruptcy but they own something that is very important to them and that they don’t want to lose to the chapter 7 trustee for liquidation or sell prior to filing a case.
A Chapter 13 case allows for the asset to be kept as long as the market value of that asset is paid so that creditors get at least it’s market value.
This only makes sense if the amount paid to keep the asset is less (far less) than the amount paid to creditors.
There are other reasons to use a chapter 13 bankruptcy case instead of a chapter 7 case. Many in fact. Most people find themselves in one of the predicaments above. If you do, see an experienced Chapter 13 bankruptcy attorney.