Drowning in debt and feeling like you have no options? Financial trouble can be draining. Filing for bankruptcy offers a solution but it can be tricky to figure out if it’s the best solution. Each type of bankruptcy offers unique advantages and disadvantages. Most of the variations are based on what personal items and property you’re able to keep, what debts you are required to pay back and what debt will be discharged. When you’re considering your options, it’s important to know what the difference is between chapter 7 and chapter 13 bankruptcy.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy, often referred to as “reorganization,” involves constructing an affordable repayment plan to repay what you are required to keep your property, while limiting what you pay to unsecured creditors based upon what you can afford, instead of what you owe. A bankruptcy lawyer can help you gather the appropriate information, properly file all documents and draft a plan that meets statutory requirements. The goal is to get the plan approved by the court and then monitored and carried out by a trustee who is designated by the court. Let’s take a look at the pros and cons of filing Chapter 13 bankruptcy.
You’re allowed to keep your property
By committing to a repayment plan, you may be allowed to keep all of the property you own. This is different than in chapter 7, where you will lose any non-exempt property. Any foreclosures or repossessions will stop, unlike in chapter 7 bankruptcy. This is a HUGE advantage with chapter 13, and if you have important property you’d like to keep, it’s definitely something to consider.
Protection for your cosigners
Creditors will not be able to attempt to collect consumer debts from your cosigners that you propose to pay in your plan, and having a cosigner is cause to specially classify that debt ahead of all other unsecured debts. This means your cosigner will not need to make payments, they will not be charged fees, the credit reporting agencies should not be reporting them delinquent, and ultimately their responsibility for the debt will cease if your plan provides for payment of the debt.
On your credit report for a shorter period of time
When you file for chapter 13 bankruptcy, it can remain on your credit report for seven years. This is less than chapter 7 bankruptcy, which stays on your credit report for 10 years.
Chapter 13 contains other special ‘devices’ to treat your debts differently
When you file for chapter 13 bankruptcy you have the ability to modify certain secured debts in a way you cannot in a chapter 7. For instance, if your home is severely underwater due to a market change and you can show you owe more on a first mortgage then the home is worth, it may be possible to strip a second or junior mortgage off real estate. Another example is when you have a vehicle that you’ve been paying on for years or with an extremely high interest rate, you may be able to modify the loan amount to something more reasonably related to the collateral.
Chapter 13 allows you to discharge certain debts that you cannot in Chapter 7
Congress has narrowed the scope of the Chapter 13 discharge, but there are a few things that are dischargeable in a Chapter 13 that are not in Chapter 7, such as certain civil fines and penalties. But maybe the biggest benefit in terms of discharge lies in divorce property settlements. Anything that is based upon a domestic support obligation remains nondischargeable, but equitable distribution claims can be discharged in a 13.
Can be a lengthy process
Chapter 13 bankruptcy payment plans will last between 3-5 years, so it’s not a quick solution. However, once your payment plan is complete, the remaining debts will be discharged.
You need to have regular disposable income
In order to file chapter 13 bankruptcy, you need to make enough money on a regular basis to contribute to your payment plan monthly. While any disposable income may be used to repay your unsecured creditors, so lower income may seem like a good fit, there are certain debts you have to pay in a plan, such as tax debts and mortgage arrears, and if you don’t have enough disposable income to pay these, your plan is not feasible.
Discharge is not granted until payment plan is complete
If at any time you fail to make your monthly payment, your case may be dismissed. Since discharge is not granted until all plan payments are made, this means all of your debt will become re-collectible.
Get help from an experienced bankruptcy attorney
If you’re considering filing for chapter 13 bankruptcy, it’s important to speak to a bankruptcy lawyer who understands the ins and outs of bankruptcy filings. The Bankruptcy team at Mette, Evans & Woodside understand that life happens and offer judgment-free guidance. If you’d like to schedule a free consultation to discuss your options, give Tracy L. Updike a call. Tracy has extensive experience with consumer bankruptcy and helping clients get back on the right financial path. Call and schedule your consultation today, (717) 896-1317.