Chapter 13 Bankruptcy
If you feel as though you’re currently drowning in debt, you’re not alone. The average American has over $50,000 in debt — and many people are stretching repayment out by making minimum payments.
Chapter 13 bankruptcy is a special type of bankruptcy that lets you get back in charge of your debt, without having to liquidate any of your assets. Chapter 13 bankruptcy is generally easier to qualify for than Chapter 7, ensures that you pay your debts back within 3 to 5 years, and can often reduce the amount of debt you have to pay back.
What is Chapter 13 Bankruptcy?
There are two types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 is what many traditionally think of as bankruptcy. Your assets are liquidated and used to pay off your debts, after which you start with a blank slate. But Chapter 13 bankruptcy is better known as a “reorganization.” It is designed to make it easier for you to pay off your debts in a structured fashion.
During Chapter 13 bankruptcy, a plan will be developed that lets you pay back your creditors over the next 3 to 5 years. Rates will be negotiated with your creditors and any debt that still exists after the plan will be wiped out. Chapter 13 bankruptcy lets you pay off as much of your debt as possible without putting yourself at a significant financial disadvantage.
Additionally, some debts (such as debts owed to an ex-spouse after a divorce) will be discharged completely after the Chapter 13 bankruptcy has been completed.
Why Should You Choose Chapter 13 Bankruptcy?
Like Chapter 7 bankruptcy, Chapter 13 bankruptcy will typically halt collections actions — such as foreclosures. If you `are able to pay money toward your debts realistically, a Chapter 13 bankruptcy will let you take control of the situation.
Advantages of Chapter 13 bankruptcy include:
- Broader income requirements. If you have a higher income, you aren’t allowed to declare Chapter 7 bankruptcy. Chapter 13 bankruptcy, however, may still be open to you.
- Stopping foreclosure and debt collections. You will be able to halt foreclosure and debt collections, giving you more time to make financial arrangements.
- You won’t have as adverse an impact on your credit score. Once you have finished your Chapter 13 bankruptcy, your credit score will have likely recovered substantially. The adverse impact will be far more serious with Chapter 7 bankruptcy.
If you cannot reasonably pay off the bulk of your debts, however, Chapter 7 bankruptcy is going to be a better solution. Under Chapter 7 bankruptcy, you can wipe out most debts, with some minor exceptions (such as student loans).
How Do You File Chapter 13 Bankruptcy?
Under the Chapter 7 bankruptcy process, your financial situation will be reviewed. It will need to be established that you cannot reasonably pay back all your debts without a substantial hardship on your part. This will require that you turn over any documentation regarding your income, expenses, assets, and debts.
From there, a 3 to 5-year payment plan will be negotiated on your behalf with each of your creditors. Often, creditors will accept being paid less than is actually owed, or will drastically reduce your rates to ensure that you’re able to pay back your initial balance. From there, you simply need to continue to pay the amount that you owe — and at the end of your payment plan, the remaining debts (with some exceptions) will be discharged.
If you stop paying your payment plan, you will be in default of it, and your bankruptcy may be canceled.
When Should You Choose Chapter 7 Bankruptcy Instead?
For some, there’s a psychological benefit to walking away with a clean slate. If you can qualify for Chapter 7 bankruptcy rather than Chapter 13 bankruptcy, there are some benefits to that, too:
- You’ll be able to discharge nearly all your debts. Besides student loans and a few other protected debts, you can discharge your debts through Chapter 7 bankruptcy once the filing is completed, rather than continuing to pay.
- You can get out of an unsustainable situation. It’s possible that all your spare dollars are already going toward your debt. If it’s not reasonable to think that you will ever be able to pay this debt, you may not have to.
- It may be your only choice. You can only declare Chapter 13 bankruptcy if it’s even possible for you to make the required payments. If it isn’t, Chapter 7 is going to be advised.
Plus, more assets are protected under Chapter 7 bankruptcy than most people expect. For the vast majority of households, both homes and cars will usually be excluded.
Often, a professional will need to review your personal financial situation to determine which type of bankruptcy (if any) is right for you. Because everyone’s financial situation is unique, it isn’t always a clear-cut option. If you have a choice, Chapter 7 bankruptcy will get rid of your debts faster — but Chapter 13 will let you reorganize and pay back your debts without having to liquidate.
Are You Interested in Chapter 7 or Chapter 13 Bankruptcy?
You may not know which type of bankruptcy is right for you — or if any type of bankruptcy is right for you. But we can help. Connect with us today to learn more about Chapter 7 and Chapter 13 bankruptcy, the benefits, and the drawbacks. We’ll work with you to determine the best path forward for your financial future.