Chapter 13 bankruptcy provides a viable option for those who are unable to qualify for Chapter 7, or for those who wish to keep their assets while still being able to get a better handle on debt. There are several important provisions to be aware of for Chapter 13 bankruptcy, but the main thing to know is that this form of bankruptcy does not simply liquidate debt like Chapter 7; instead, you will repay at least some of the total debt you owe during a three-to-five year period of time, in exchange for keeping your assets.

 

Chapter 13 Bankruptcy

Chapter 13 bankruptcy has become a very common form of consumer bankruptcy since changes to the bankruptcy code in 2005 made it impossible for many individuals to file Chapter 7. While Chapter 7 has an income cap, wherein you must pass a “means” test or make less than the median income in your state, Chapter 13 does not institute this limitation. Further, while Chapter 7 requires debtors to turn over all non-exempt assets for sale, Chapter 13 does not require this.

In a Chapter 13:

  • You will make a list of debts you owe
  • You will create a repayment plan, which must be approved by creditors. The amount you will pay to the creditors on a monthly basis will be based on your income; however, creditors will generally receive more repayment than they would under Chapter 7.
  • You will need to fulfill the terms of the repayment agreement, which extend for anywhere from three to five years depending on your income and debt load.
  • At the end of this period, any remaining debts you had originally owed are forgiven or discharged and the bankruptcy filing is complete.

This means Chapter 13 bankruptcy allows you to keep your home and other possessions. It may also not be as damaging to your credit as Chapter 7.

Getting Help for Chapter 13 Bankruptcy

Deciding which Chapter of bankruptcy to file is best done after consultation with a legal professional. A bankruptcy lawyer can help you to assess what option is best for your given situation.

What are the disadvantages of Chapter 13?

The disadvantages of this type of bankruptcy are:

  • Chapter 13 bankruptcy will appear on your credit report for 7 years.
  • Borrowing a large sum of money may be difficult as creditors may question your credibility.
  • The repayment period after Chapter 13 filing hampers your usual living standards as you’re put to a rigid budget.
  • Not all debts are discharged under Chapter 13.
  • Legal fees may be higher.
  • The amount of debt you can discharge under Chapter 13 is limited.
  • Stock brokers and commodity brokers are not allowed to file a petition under Chapter 13 bankruptcy.
  • After you get a bankruptcy discharge, you can get credit only at high interest rates.
  • You need to pay extra costs like trustee’s fee, attorney and court fees, etc.

Chapter 13 bankruptcy does provide you with a way out of debt but prior to filing it, you need to explore other options such as debt consolidation, settlement or debt management. Such options will help you pay your debts comfortably, so that you can avoid being harassed by creditors or collection agencies.

What funds can you use to pay debts under Chapter 13?

You can use the following sources of income to pay your bills under a Chapter 13 repayment plan.

  • Any kind of wages or business profits.
  • Pension payments.
  • Social Security benefits.
  • Child support or alimony.
  • Earnings from royalties and rents.

What are the advantages of filing Chapter 13?

The advantages of filing this type of bankruptcy are given below:

  • You can keep both exempt and non-exempt properties.
  • Debts that cannot be discharged by Chapter 7 can be reduced under Chapter 13.
  • Chapter 13 helps avoid wage garnishment.
  • Co-signers will be protected under this Chapter.
  • Foreclosure on a home can be delayed.
  • Chapter 13 can be filed immediately after Chapter 7 discharge to pay off any remaining liens.
  • Offers the provision under which interest rates on certain loans can be reduced.
  • Payment term on most debts can be extended under Chapter 13.

What are the reasons to file Chapter 13 bankruptcy?

Chapter 13 bankruptcy can be filed for the following reasons:

  • If you are having problems in paying off the secured loans (such as cars or houses) and need to catch up before foreclosure or repossession.
  • It may also be appropriate if you have a tax obligation or a student loan that can not be discharged in Chapter 7. You can include these debts in the Chapter 13 repayment plan and pay them off over time.
  • If you want to retain the non exempt property.
  • If you have a co-debtor on a personal loan. Filing for Chapter 7 bankruptcy will cause a big trouble for your co-debtor (incase you have a co-debtor) on a personal debt. Your creditors will undoubtedly go after the co-debtor for payment of the debts. If you file for Chapter 13 bankruptcy, the creditor will not disturb your co-debtor for payments as long as you keep up with your repayment plan.

Who qualifies for Chapter 13?

Chapter 13 can be filed by:

    • Individuals having regular income.
    • Individuals not having more than $250,000 in unsecured debt and more than $750,000 in secured debt.

What kinds of debts are discharged in Chapter 13?

Dischargeable Non Dischargeable
Personal loans long term debts such as a home mortgage
Credit cards Government funded or guaranteed educational loans
Debts due to fraud, false representations, embezzlement or larceny Payments imposed on the debtor due to criminal convictions
Certain income tax debts Debts for alimony
Debts incurred by willful and malicious injury to another person or their property. Maintenance and support obligations
Mortgage Debts incurred due to death or personal injury caused by driving as a result of intoxication or under the influence of drugs