Chapter 13 bankruptcy is an option to consider for those in tight financial situations. There are benefits and drawbacks to filing for Chapter 13 bankruptcy, though, and it will be important to consider these points when making the decision to file. In today’s blog, we discuss these particular pros and cons of filing for Chapter 13 bankruptcy and how your situation might affect your decision.
How Does Chapter 13 Bankruptcy Work?
Chapter 13 bankruptcy is a repayment plan (usually a duration of 36 to 60 months) which proposes to the court to pay back some or all your outstanding debt to creditors. In most cases, you will only pay back a portion of your total outstanding debt to creditors. Note that a 36-month plan is proposed to the court if your gross income is below the median income for your state, and a 60-month plan will be proposed if your gross income is above the median income for your state.
A Chapter 13 Bankruptcy plan will propose an amount a person will pay back to creditors and will establish the timeline in which the person will pay back the amount. Once the bankruptcy case is filed, the first plan payment is due 30 days after the filing date. Once you complete your repayment plan term, the remaining dischargeable debt that was not paid back during the term of your plan will be discharged, and you will no longer be personally liable for the payment on these debts.
What Is the Downside of Filing for Bankruptcy?
There are a few downsides to consider when deciding if you should file for Chapter 13 bankruptcy. It can take a substantial amount of time, stay on your credit for many years, and make it difficult to get other loans or credits.
How Long Does a Chapter 13 Plan Take to Repay?
Be aware that it can take up 5 five years for you to repay your debts under a Chapter 13 plan, and debts must be paid out of your disposable income. Disposable income is any income you have left over after spending on necessities like food, shelter, and medical care. In other words, all your extra cash will thus be tied up during the entire repayment plan.
How Long Does Chapter 13 Stay on a Credit Report?
Any bankruptcy filing could also negatively impact your credit for some time. A Chapter 13 bankruptcy can remain on your credit report for up to 10 years, and you will lose all your credit cards. Bankruptcy also makes it nearly impossible to get a mortgage if you don't already have one.
Further, note that you will not be able to file for Chapter 7 bankruptcy if you went through bankruptcy proceedings under Chapter 13 within the last 6 years; declaring bankruptcy under Chapter 13 will make it harder to declare under Chapter 7 later. Be aware that you cannot file for Chapter 13 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:
- you violated a court order, or
- you requested the dismissal after a creditor asked for relief from the automatic stay.
Note that if you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the 6-year ban on Chapter 7 bankruptcy doesn’t apply.
While the repayment plan for Chapter 13 bankruptcy may address some forms of debt, it won't relieve alimony and/or child support obligations nor any student loan debt. You may still be obligated to pay some of your debts, such as a mortgage lien, even after you complete the bankruptcy proceedings.
Advantages of Filing for Chapter 13 Bankruptcy
There are advantages that address the drawbacks of Chapter 13 bankruptcy. While it generally takes longer in Chapter 13 to pay off your debts, you'll have more time to make your payments, and Chapter 13 trustees may be flexible on the terms of your payments. For instance, you may be able to:
- stretch out your debt payments,
- reduce the amounts of your payments, or
- give up an item of your property that you're making payments on.
Note that once you successfully complete a repayment plan under Chapter 13, individual creditors can't obligate you to pay them in full.
Further, although a Chapter 13 bankruptcy will stay on your record for years, it is a small trade-off for missed debt payments, defaults, repossessions, and lawsuits that could hurt your credit even more and be harder to explain to a future lender than bankruptcy.
In many cases, declaring bankruptcy can get you started sooner on rebuilding your credit. While you can only file under Chapter 7 once every 6 years, you can always get a Chapter 13 plan if you encounter another financial disaster before you're entitled to file for Chapter 7. In other words, you may file for a Chapter 13 plan repeatedly (although each filing will appear on your credit record).
As addressed earlier, Chapter 13 bankruptcy will not relieve an individual of their alimony or child support obligations. However, bankruptcy can at least alleviate many of a person’s other financial obligations that are hindering their financial recovery. Nothing will get rid of student loan debt, but at least bankruptcy will prevent lenders from aggressive collection action.
Contact Bridges, Jillisky, Weller & Gullifer, LLC Today
The decision to file for bankruptcy is an important one that requires thorough consideration about both the advantages and disadvantages. If you are interested in filing for Chapter 13 bankruptcy or would like to discuss the process with an experienced attorney, reach out to Bridges, Jillisky, Weller & Gullifer, LLC today. We can provide the legal guidance you need to make the right financial decision for your situation.
Contact us at Bridges, Jillisky, Weller & Gullifer, LLC today to schedule a free consultation today.