There are four Chapters in bankruptcy available to individuals, they are Chapters 7, 11, 12, and 13. Chapter 11 is usually associated with big businesses, like Winn Dixie did a few years ago. Chapter 12 rarely used and is specially formulated for “Farmers and Fishermen”. So it’s Chapters 7 and 13 that people usually think of when they think of bankruptcy.
Many people coming into my office have done some research and because they’ve discovered that there are payments required in a Chapter 13, they instantly decided that Chapter 7 is best for them. Chapter 7 may be a quicker and less expensive bankruptcy, but it often means liquidating your unexempt assets and surrendering any secured assets whose payments are behind.
Chapter 13 offers some forms of relief that aren’t available in Chapter 7. The Chapter 13 gives a debtor the opportunity to “catch up” on any mortgage arrears they have by spreading the amount owed over a five-year period.
There is also the opportunity of re-classifying “secured” second and third mortgages as “unsecured” debts in a process called, “Lien Stripping”. This would mean that after making five years of payments toward your unsecured creditors, the remainder of that second mortgage is discharged in the same way a credit card debt would be. This can be a huge advantage for some people.
Another valuable option in a Chapter 13 is the “Cram-Down” option under 11 USC § 506, which allows debtors to “cram down” the secured amount of a debt on a vehicle or other property under the right circumstances. This has been hugely advantageous to some truck drivers who have very large “secured” notes on trucks whose values have diminished over the years faster than the amounts owed on them.
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