For those debtors whose income exceed the state prescribed median income and/or have failed the bankruptcy “Means Test,” filing under Chapter 13 Bankruptcy can be a viable alternative for debtors who just need more time to pay off debts and who have a steady income stream sufficient to meet the standards under Chapter 13.
If a debtor's average monthly income during the six months preceding the filing for bankruptcy is higher than the state prescribed median income, he or she may be required to file under Chapter 13. The bankruptcy means test further requires a debtor file under Chapter 13 if the disposable income (i.e., income minus expenses) would allow for repayment of unsecured debts to creditors over a predetermined fixed period of time.
Chapter 13 allows debtors to repay debts out of personal income rather than by selling off property. A debtor filing under Chapter 13 is not required to give up a primary residence, even if the debtor has nonexempt equity in the home, and a debtor may keep all other property in his possession regardless of value. However, the debtor will need to repay his unsecured creditors at least the value of his nonexempt property over the life of the Chapter 13 repayment plan, usually a predetermined period of 3 years or 5 years.
Chapter 13 also permits a debtor to spread out his payments of missed installments, taxes, and late charges and late payments on his mortgage. And, if a lender has started foreclosure proceedings on a debtor's home, a Chapter 13 bankruptcy can stop the foreclosure proceedings, provided the home has not yet been auctioned off by the lender.
Although Chapter 7 seems easier, and often does not require repayment of unsecured debts, there are good reasons why debtors who qualify for both types of bankruptcy elect Chapter 13 instead of Chapter 7. Chapter 13 is appropriate for debtors with sufficient, reliable income and can repay a portion of existing debt under a predetermined court plan for a period of 3 years or 5 years.
Under Chapter 13, a debtor facing foreclosure on his home can also make up his missed mortgage payments over time by proposing a repayment plan that includes all the missed payments. As long as the debtor stays current on his future mortgage payments during the life of his Chapter 13 repayment plan, he will be able to reinstate his original mortgage contract with the lender. This option is not available for debtors who file under Chapter 7 (unless the debtor is able to work out a loan modification / restructuring with the lender outside of bankruptcy).
Debtors who have more than one mortgage on their home and who are in threat of foreclosure because they can no longer make all their payments on outstanding liens, may elect to file under Chapter 13 if their home's value is less than, or equal to what is currently owed on their first mortgage. Chapter 13 can be used as a vehicle to relieve debtors of the additional mortgages (which if avoided successfully would be treated as unsecured debts). This “lien stripping” procedure can result in lowering the amount a debtor makes on his monthly mortgage payments.