Chapter 13 is often referred to as a debt consolidation that you force upon your creditors. But I prefer to look at it as a consumer reorganization where you decide what to do with certain debts like vehicle loans, second mortgages, missed payments on your first mortgage, back income taxes and of course your unsecured consumer debts as well. Chapter 13 is part of the United States Bankruptcy Code and carries with it all the weight and power of the Federal Government. As such, if it is used effectively, it can accomplish many things that once the dust settles it creates a decent life for the consumer. Here are some of the things that a chapter 13 can do for you:

1. Stop a Foreclosure. I have filed chapter 13 petitions the day before a foreclosure sale and set the consumer up with a payment plan to catch up on all the back payments and foreclosure fees that allow them to stay in their home for many years to come or to give them time to sell the property and not lose the equity that they had.

2. Tax Nightmares: Nothing is worse than having the Internal Revenue Service of the Federal Government or the Franchise Tax Board of the State of California after you. They are rude, obnoxious, relentless and have little regard for you or your family’s well being. They think only one thing and that is that you did not pay your taxes and they are going to get their money NOW. When I get them in Bankruptcy Court those tactics do not fly. If the taxes are too old, then they get wiped out and what taxes they do have to pay stop accruing interest and can be paid out over a five year period if the debtor so chooses and there is nothing the tax man can do about it.

3. Wipe out Second Mortgages (Lien Stripping). If there is not one cent of equity in your second mortgage which means that the amount you owe on your first mortgage exceeds the fair market value of the home, then the second mortgage can be stripped in a chapter 13 and becomes an unsecured creditor just like a credit card. So for people that are choking on the second mortgage payment, there is a way out. People get confused and think they can strip a second mortgage in a chapter 7, but they cannot. Lien Stripping can only be done in a chapter 13.

4. Stopping Vehicle Repossessions, Cramming Down Car and RV Values, and reducing interest rates. If you are a couple payments behind on your vehicle and fear the repo man, filing a chapter 13 stops that cold. You enter into a payment plan and pay the car off over up to a five year period. Also, if you have owned your vehicle for more than 910 days, then in a chapter 13 you can cram down the amount of the loan down to the value of the car. So if you still owe $15,000 on a car worth $10,000, then in a chapter 13 you only have to pay back the $10,000 that it is worth as the other $5,000 becomes an unsecured creditor just like a credit card. In addition, if you were choking on a 15 or 20% interest rate, you can reduce that to around 5% if your case is prepared properly.

5. Stop Wage Garnishments and Bank Levies. Just like chapter 7, chapter 13 stops wage garnishments and bank levies immediately upon the filing of the chapter 13 petition. In many cases, I can also recover the money levied in the previous ninety days as well which really helps consumers get some normalcy back into their lives.

For consumers that exceed the median income and fail the means test, chapter 13 is where they can get relief from their debts. They will pay some of their unsecured debt back. But usually they do get some of the benefits listed above too so its not always all bad.

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Attorney Steven F. Bliss is a debt relief agency under the United States Bankruptcy Code.