Pros and Cons of Filing a Chapter 13 Bankruptcy Case
If you are struggling to pay debts that you do not have the money to pay each month, you may benefit from filing for bankruptcy relief. For individuals and couples who have a steady monthly income, filing a Chapter 13 bankruptcy case can provide relief from creditors while providing several advantages over attempting to handle the debt on your own.
Benefits and Advantages of Filing a Chapter 13 Bankruptcy Case
Filing for bankruptcy relief can have many positive results including:
- You can get rid of your unsecured debt for a percentage of what is owed on the account. Examples of unsecured debts include credit card debt, medical bills, personal loans, payday advances, and old utility bills. When you complete your plan, you are not legally required to repay the remaining balances owed on discharged debts.
- Liens on household goods that you owned before taking out the loan can be voided so you keep your property and the debt becomes an unsecured debt.
- You can stop foreclosure and stop repossessions by filing Chapter 13. The past due mortgage payments are paid through your bankruptcy plan, and you resume normal mortgage payments to the lender.
- Some vehicle liens can be valued at the fair market value of the vehicle if the vehicle is worth less than the amount owed to the secured creditor. The remaining amount of the loan becomes unsecured and receives the same percentage of payment as your other unsecured debts.
- You might avoid a contempt charge or jail time for past due alimony and child support. The past due amounts are paid through the plan, and you resume normal support payments.
- If your home is worth less than you owe on your first mortgage, you might be able to value a second mortgage at zero. The debt becomes unsecured and receives a fraction of the amount owed before filing Chapter 13.
- Creditors cannot “opt out” of your bankruptcy plan except for a few very narrowly defined reasons. If you use a debt consolidation company, creditors are not legally obligated to participate in the plan.
- As long as you remain in your bankruptcy case, creditors and debt collectors cannot harass you or contact you regarding payment without court approval. A creditor cannot take legal action (e. foreclosure, repossession, collection lawsuit, etc.) without court approval.
- Bankruptcy exemptions can be very generous. In most cases, the state’s bankruptcy exemptions cover all equity in your assets, thereby protecting your property from creditors and the court.
Depending on your specific financial situation, you might find more pros of filing Chapter 13.
Disadvantages and Cons of Filing a Chapter 13 Bankruptcy Case
Below are things that some debtors view as negative consequences of filing Chapter 13:
- Most Chapter 13 bankruptcy plans take 60 months to complete. However, when you complete your Chapter 13 plan, you should be in a better financial situation than you were when you filed for bankruptcy relief.
- You are required to complete a credit counseling course and a debt management course as part of your case. The good news is that the courses are available online, can be completed in two hours or less, and are inexpensive. Many debtors report learning valuable tips for handling credit wisely, budgeting, and managing money.
- The Chapter 13 plan payment may be automatically deducted from your paycheck. However, debtors who have their payments deducted are often successful in completing their plan.
- The filing will be reported on your credit report for seven years, which is three years less than a Chapter 7 filing. However, many debtors see an improvement in their credit score as they continue to make the payments to the trustee and the payments outside of the plan.
- You cannot incur debt or transfer major assets (e. real estate, vehicle, etc.) while you are in Chapter 13 without court approval. In some cases, the court will grant a Motion to Incur Debt or a Motion to Sell Property depending on the circumstances surrounding the request.
- Bankruptcy does not discharge student loans. However, your student loan provider receives the same percentage of payment as your other unsecured creditors. Also, you are not required to pay the student loan payments during your bankruptcy unless you choose to do so to avoid additional interest.
As you can see, many of the so-called negative aspects of filing a Chapter 13 have a positive element.