The Pros And Cons Of Chapter 13 Bankruptcy

Mar 27, 2024 | Bankruptcy

Are you struggling to manage your debts and looking for a way to gain control of your financial situation? Chapter 13 bankruptcy might be the solution you need. This legal process allows individuals with a regular income to create a repayment plan to gradually pay off their debts over a specified period of time.

It is important to have a clear understanding of the advantages and disadvantages of Chapter 13 bankruptcy before making any final decisions. On one hand, it provides a chance to save your assets from liquidation and stop foreclosure. On the other hand, it has its downsides, such as the impact on your credit score and the strict regulations you must adhere to.

In this article, we will explore the benefits and drawbacks of Chapter 13 bankruptcy, helping you make an informed choice about your financial future.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, also known as a reorganization bankruptcy, is a type of bankruptcy that allows individuals who have a steady source of income to develop an affordable repayment plan for all or a portion of their debts over a period of three to five years. This type of bankruptcy differs from Chapter 7 bankruptcy in that it does not involve selling property in order to pay back debtors.

Individuals with regular income who wish to prevent foreclosure on a home or repossession of a car can benefit from filing. Chapter 13 bankruptcy allows debtors to take back control of their finances and make circumstances more manageable until they are once again debt-free.

Chapter 13 vs. Chapter 7

The United States Bankruptcy Code allows individuals to file under either Chapter 13 or Chapter 7. The main difference between Chapter 13 and Chapter 7 is how the debts are handled.

In Chapter 7, the debtor’s non-exempt assets are liquidated to repay your creditors, whereas in Chapter 13, the debtor formulates a repayment plan and repays a portion of their debts over a 3-5 year period. People who file for Chapter 13 can keep their property and make up payments for missed mortgage or car payments as long as they have a steady income. Chapter 7 is typically for those who have no income or little to no assets.

Who Qualifies? 

Chapter 13 bankruptcy allows only individuals with a stable income to restructure their debt into a repayment plan. To file for Chapter 13 bankruptcy, the following conditions must be met: You have a steady source of income sufficient to make monthly payments to pay down your debts; your combined unsecured debts and secured debts are below the allowable threshold of $2,725,625 as of June 2022; and you have received credit counseling from an approved agency six months prior to filing for bankruptcy.

Which Debts Can Be Discharged?

There are many different kinds of debts that can be included in a Chapter 13 bankruptcy, although not all debts can be discharged. They include credit card debt, some personal loans, medical bills, and past-due bills incurred by utilities like gas and electricity. There are some taxes that can be included in the plan as well, but tax debts must satisfy certain criteria.

Debts that cannot be eliminated in Chapter 13 include child support and alimony, most student loans, and certain criminal fines. Anyone who wonders about filing for Chapter 13 should consult an attorney about which debts can be included in a plan.

How Long Does It Take?

The length of a Chapter 13 bankruptcy case is determined by the plan length, but frequently lasts between three to five years. The debtor will make a monthly payment to the Chapter 13 trustee, who will then disperse the funds to the creditors pursuant to the plan requirements.

The length of the repayment plan is calculated based on the debtor’s income, expenses, and disposable income that could be applied towards the plan. Once the payment plan is finished, any debts that are eligible to be forgiven and are still in bankruptcy could be wiped out.

What Happens If You Don’t Complete Your Plan?

If you do not complete your Chapter 13 plan, the court may dismiss your case. If your case is dismissed, the federal discharge injunction on the automatic stay will be lifted, and creditors can continue collection efforts. Your previously discharged debt may become payable again, and you may become subject to a lawsuit and/or wage garnishment by your creditors. If you are in Chapter 13, it is important that you complete your payment plan, or you should talk to your bankruptcy lawyer if you have trouble completing it.

Advantages Of Chapter 13

Benefits include the retention of assets, the stay of all collection efforts, and the ability to repay a portion of all unsecured debts while all other secured debts remain untouched.

  • Repayment Plan: Under Chapter 13 bankruptcy, you can make a payment plan that works with your budget, not one that you can not afford. If you need to catch up on payments on your home mortgage or a car loan, a Chapter 13 repayment plan could help put you back on track.
  • Protect Your Assets: Chapter 13 allows you to keep your assets while you pay them back, which is especially helpful if you have valuable property or other hard assets that you would have had to liquidate in Chapter 7.
  • Protection From Foreclosure Or Repossession: Filing for Chapter 13 bankruptcy will immediately stop any foreclosure or repossession action against your home or vehicle. This gives you time to catch up, deal with past-due payments, and keep your home or car.
  • Longer Payment Period: By spreading your payments over a longer period of time (3-5 years), your monthly payments are lower and more manageable.
  • Co-Debtor Stay:  If the debt you file is one that you co-signed with another person, the co-debtor stay will prevent the creditor from going after your co-debtor while your case in bankruptcy court is pending.
  • Paying Off Priority Debts: Chapter 13 lays out a repayment plan for priority debts, which include unpaid taxes and unpaid child support.

Disadvantages Of Chapter 13

  • Longer Payment Period: Whereas Chapter 7 bankruptcy might be completed within a few months, Chapter 13 bankruptcy will require a repayment plan for three to five years. You will be obligated to meet the terms of your repayment for an additional three to five years. For many people, this means that they will pay more over the course of their repayment plans than if they filed under Chapter 7, which gets rid of certain debts.
  • Repayment Of Debt: If you are eligible for Chapter 13 bankruptcy, you will still likely be required to pay back your debts in full, unlike Chapter 7 bankruptcy, which dismisses some or all of your debts.
  • Impact On Your Credit: Filing Chapter 13 bankruptcy would affect your credit score. If you file for bankruptcy, it will show up on your credit report for seven years. This may make it harder for you to get credit or better terms on another loan in the future.
  • Forfeiture Of Non-Exempt Assets: If you do not have any bankruptcy exemptions for non-exempt assets, you may have to give them to your creditors or include them in your payment plan.
  • Discharge Of Debts Is Limited: Certain debts, such as student loans, most tax debts, and some domestic support obligations generally cannot be discharged through Chapter 13. The balance of these debts will still have to be paid or dealt with in another way.

Call Ted Machi & Associates, P.C., For A Free Legal Consultation.

If you’re feeling burdened by significant debt, don’t hesitate to reach out to our law firm. We’re here to help! Ted Machi, our lead attorney, brings over 25 years of experience in guiding clients through bankruptcy and helping them overcome debt. As a small, boutique bankruptcy firm, we pride ourselves on providing dedicated attorney attention and personalized customer service that larger firms simply can’t match!

Don’t hesitate to book your free consultation today and get started on your journey. You’ll have the opportunity to learn more and get all the information you need.

Ted Machi & Associates, P.C.

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