When Alphonzo Kershaw fell behind on the mortgage of a second home last year, he filed for Chapter 13 bankruptcy, which would prevent a foreclosure and enable him to pay back more than $40,000 in past due mortgage payments and real estate taxes over a five-year period. “I believed I would be able to pay it off,” says the 68-year-old retired executive chef from Philadelphia. However, five months later, health problems and mounting bills made it difficult for Kershaw to keep up with $750 monthly installments under the court-ordered repayment plan.
Had Kershaw filed for Chapter 7 bankruptcy protection from the start, he would have lost the house, but walked away from the entire debt. A conversion from a Chapter 13 bankruptcy to a Chapter 7 bankruptcy is a viable option for those like Kershaw who are unable to complete the three-to-five-year required repayment plan. By converting to a Chapter 7, Kershaw was able to discharge his debts, including the $80,000 mortgage, property taxes, and credit card balances.
Circumstances such as a medical issue or a loss of income can prompt someone to switch from Chapter 13 to Chapter 7. Often people get started on a repayment plan, but then can’t afford it, says Théda W. Page, a Frisco, Texas-based bankruptcy attorney and owner of The Page Law Firm.
The vast majority of debtors file under Chapter 7 of the bankruptcy code, which allows them to erase most unsecured debts in a matter of months. A Chapter 7 bankruptcy is a liquidation of non-exempt assets, says William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys and a practicing lawyer in Raleigh, North Carolina. Filing Chapter 7 does not discharge financial obligations such as back taxes, child support, alimony, and student loans. Chapter 13 was designed to stop foreclosure, repossession, garnishing wages, and lawsuits. Under a Chapter 13 bankruptcy, a debt repayment plan requires filers to dedicate their disposable income to catch up on their delinquent accounts, such as mortgage or car payments, over three to five years.
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