Two types of bankruptcy: Chapter 7 vs. Chapter 13
There are significant differences between Ch7 and Ch13 – specifically in how the property you decide to keep is handled.
1. Chapter 7: Eliminates all dischargeable debt. Any secured debt is eliminated upon surrender of the collateral. If you choose to keep the secured property in Chapter 7, you will be required to sign an agreement between you and the lender reaffirming your debt and personal obligations on the note. This is called a reaffirmation agreement. The court must approve the agreement and it can be revoked within 60 days after signing.
Reaffirmation agreements must be carefully considered. One of the biggest considerations is that if you get behind on payments again and the car is repossessed, this is considered post-petition debt, which is non dischargeable.
2. Chapter 13: This creates a Plan that you pay off in 3-5 years. Dischargeable debt is eliminated once you have completed the Plan. Secured debts (e.g. car loans, title loans, Nebraska Furniture Mart) can be lumped into the Plan as well as attorney fees, court fees and administrative costs. Some non-dischargeable debts like taxes can also be added to the plan as well.
Cram Down Basics: One powerful feature of a Chapter 13 bankruptcy is the ability to “Cram Down” certain secured debts that qualify. If you have an auto loan and you are paying a high interest rate, you can pay the automobile back at the “discount” or “till” rate through the plan. The discount rate is currently 4.75%, but can and does fluctuate. If you have owned your vehicle for more than 910 days (roughly 2.5 years) you only need to pay the value of the vehicle or the contract balance – whichever is lower. For example, you owe $18,000 on your car, but it’s only worth $12,000. If you have owned your car for over 2.5 years, you would only have to pay $12,000 in the plan. This is a huge advantage for people who want to retain a vehicle with negative equity (i.e. they are “upside down” on their loan).