What Is Chapter 13 Bankruptcy And (When) Should You File For It?
Staying financially sound throughout life can be tough. The more assets you possess, the tougher it gets. The cost of tags for your boat, truck, and car might take so much from your check, there’s nothing left to pay your overdrafted credit cards with.
When the stress of mounting financial debt becomes too much, people begin to consider filing for bankruptcy. The second most common form of bankruptcy is Chapter 13, the first being Chapter 7 bankruptcy. The US government states online that Chapter 13 is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.
Are you Eligible?
As long as you have a steady income and your debt does not exceed what is allowed, you can file for Chapter 13 bankruptcy. And depending on whether your income is below or above the median, you will repay your debts between 3 to 5 years.
According to Credit Karma, here are some important details about Chapter 13 bankruptcy to have in mind:
- Regular income is required
- You must provide up-to-date tax returns and payments
- Unsecured debts, like those from unsecured credit cards and personal loans, can’t exceed $394,725. Secured debt – for example, from a mortgage or car loan – can’t exceed $1,184,200.
- You may not qualify if you’ve had a bankruptcy dismissed within 180 days for a failure to appear in or comply with the bankruptcy court.
- To receive a discharge at the end of a Chapter 13 repayment plan, you can’t have received a discharge from a Chapter 13 bankruptcy within the previous two years or from a Chapter 7, Chapter 11 and Chapter 12 within the previous four years.
Types of Debts
In Chapter 13 bankruptcy there are three types of debt, though not all may need to be repaid:
- Priority Debt – these include child support, tax obligations, and student loans. These are the debts that must be completely settled.
- Secured Debt – these include debts that are paid over time such as car loans or home mortgages. Missed payments may be added to the current repayment plan.
- Unsecured Debt – outstanding credit card balances can have a restructured payment plan, reducing the debt and possibly forgiving the debt once the requirements of the payment plan have been satisfied.
Benefits of Chapter 13 Bankruptcy
Filing for bankruptcy is something everyone hopes they never have to do, but there are benefits to going with specific Chapters.
The biggest benefit to Chapter 13 bankruptcy that you can keep the home looked to as collateral, and you won’t go into foreclosure. It also prevents creditors from trying to collect your debt from your co-signers.
The three to five-year repayment plans may also be a great help. You are given a pretty good chance to make successful on-time payments, earning the opportunity to have the rest of the debt forgiven at the end of the plan.
The biggest advantage, for me at least, is the fact that creditors are not allowed to call or attempt any collection on the debt while you are on Chapter 13.
Negative Aspects of Chapter 13 Bankruptcy
Perhaps the worst part of filing for Chapter 13 bankruptcy is how hard it hits your credit score. On-time payment also doesn’t do much to help the damage done by filing. Be prepared to see that dark spot on your credit report for at least a decade.
There’s also no guarantee you’ll stay with the income you had when you first filed. If you lose your job and you’re unemployed for too long, the debt may get away from you.
You may also find it difficult to build new credit after filing for Chapter 13 bankruptcy.
A few years ago my parent files for bankruptcy, though I’m not sure which Chapter they filed for. Their debt, according to my mother, exceeded $300,000. Eventually, they were to meet in court with creditors to likely restructure the debt for a repayment plan.
Surprisingly, no creditor went to court proceedings, and the judge ruled the debts completely dissolved.
Not everyone’s bankruptcy story can be as lucky as my parents, so make sure to avoid risking bankruptcy. Do not get that new WalMart or JC Penny credit card. You spend too much and it won’t end well.
Have you ever filed for bankruptcy? What Chapter? Are the requirements reasonable?