A Chapter 13 is a repayment plan of some or all of your debt over a three- to five-year period. While there are myriad reasons for filing Chapter 13 bankruptcy, it is usually for one of these three:
- The household income is too high to qualify for a Chapter 7.
- To get caught up on delinquent mortgage or car payments.
- To protect a valuable asset that cannot otherwise be protected in a Chapter 7.
These reasons mean you'll be in a court-monitored repayment plan for some or all of your debt.
A Chapter 7 bankruptcy is the more traditional type of bankruptcy people file. It is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. The purpose of a Chapter 7 case is to eliminate your existing debts and allow you to start rebuilding credit within a few months of filing your case.
While you may believe you deserve or qualify for a Chapter 7 because you cannot afford your bills (and sometimes your chosen lifestyle), the court may think differently. This means you will be obligated to try to pay something to your creditors in a Chapter 13 bankruptcy.
However, life and circumstances change. Just because you initially filed a Chapter 13 does not mean you must remain there permanently. People convert for various reasons, and when you convert, your "financial picture" is reassessed.
Reasons to convert
Here are the five most common reasons to convert from a Chapter 13 to Chapter 7:
- Loss of employment or significant decrease in employment income.
- Divorce or separation resulting in double the monthly household expenses.
- Planning to let your house go, or walking away from your home. You don't want to continue making mortgage payments to the court to bring the delinquent payments current.
- Dealing with an illness and high medical expenses.
- Approved for a loan modification and your home mortgage loan has been brought current. This actually does happen.
You should always reassess your financial picture every six months while inside a Chapter 13. Because circumstances can change, your Chapter 13 payment plan should change, too.
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