Getting straight with the IRS
Some taxes are non-dischargeable in bankruptcy. So instead of the fresh start they had hoped for post-bankruptcy, Chapter 7 debtors are often left with IRS debt, and no concrete plan to repay it. Penalties and interest on past-due taxes continue to accrue, even when you’re in a payment plan with the IRS. This can leave debtors feeling like they’re swimming against the tide. In contrast, Chapter 13 affords debtors the opportunity to repay these priority debts to the IRS during their Chapter 13 plan – and without accruing additional penalties and interest.
Continuing automatic stay protection
Certain debts, like student loans, are almost never dischargeable. Many debtors find it impossible to pay their other debts while keeping in good standing with their student loans. Chapter 13 bankruptcy may not cure the problem, but it does buy a debtor time away from the payment obligation. The Automatic Stay on creditor collection efforts continues for the entire term of the Chapter 13 plan (unless lifted on a surrendered secured asset). This keeps non-dischargeable creditors like student loan collectors at bay for up to 5 years. After the plan has ended, other debts have been discharged, and the debtor is in a far better financial position, he can go back to repaying his student loans.
“Cramming” motor vehicles
Due to poor credit, many people are forced to enter into terrible deals when purchasing vehicles. They typically overpay, and the interest rate on the financing tends to be extremely high. Chapter 13 bankruptcy can modify these contracts with the auto finance lenders. Depending on how long you’ve owned the vehicle, you may be able to lower the interest rate to 5.25%, while “cramming” the amount owed on the car to the actual value at the time of filing.
“Cramming” investment properties
The same rule that applies to cramming motor vehicles also applies to mortgages on investment properties. Imagine exiting bankruptcy and owning your investment property free and clear! Chapter 13 can do that. If financially feasible, you can cram down the mortgage(s) to the current market value of the property, then pay the reduced amount in the Chapter 13 plan over 60 months. The only caveat is that the property must pay for itself with rental income. But once the plan is completed and you get your discharge, the property is 100% yours – no mortgage liens attached. Now that’s a fresh start!
This concludes my three part series on the benefits of Chapter 13 over Chapter 7. It is by no means an exhaustive list. That being said, sometimes Chapter 7 does make the most sense for a particular debtor. Only after a thorough review of an individual’s specific financial situation can an informed decision be made in this regard. If you would like to schedule a free, no obligation consultation to discuss your potential bankruptcy filing, please call us at: 954-267-9377.