Under federal law, there are several types of bankruptcies available to debtors. A Chapter 7 is the most common form of bankruptcy, and involves a process of liquidation. In a Chapter 13 bankruptcy, a debtor does a reorganization and proposes a plan to pay his or her creditors over a 3 to 5 year period.
A recent study in the Journal of Legal Studies by economists Michelle White of UC San Diego and Ning Zhu of UC Davis shows found that although 96 percent of those who file Chapter 13 are homeowners, only one percent of those who would have otherwise defaulted were able to save their homes by using a Chapter 13.
Chapter 13 is designed to help homeowners save their homes in several ways. Chapter 13 delays foreclosure proceedings and gives homeowners a chance to catch up on overdue payments. Chapter 13 also helps debtors to challenge excessive fees and penalties from lenders. In addition, debtors in a Chapter 13 can discharge some or all of their unsecured debts, which frees up money that can be put towards the mortgage.
The study found that although the reason most of the Chapter 13 debtors chose Chapter 13 over the other types of bankruptcy available was in order to save their homes, Chapter 13 actually did little to help filers save their homes. One reason is that the money that is freed up by discharging the unsecured debts (typically credit cards) is not enough to save the homes for one-third of filers. Many other filers had enough money to save their homes without discharging their unsecured debts using a Chapter 13.
If you are a homeowner and are confused about which form of bankruptcy is best for allowing you to keep your home, don’t assume a Chapter 13 is best. Consult with a bankruptcy attorney.