There are two main types of consumer bankruptcy – Chapter 7 and Chapter 13. Chapter 13 is mainly for people who want to save some of their assets such as a home or car. It is also required for people with an above-average income who meet the standards for being able to pay off some of the debts.
In contrast, Chapter 7 is for people who don’t want to save their assets or aren’t in a position to save their assets. There are advantages and disadvantages to each type. Here are the pros and cons for the Chapter 13 Bankruptcy.
Filing a Chapter 13 Bankruptcy acts as an automatic stay. This means all collection efforts must stop immediately. Any creditor who wants to get relief from the automatic stay has to file for relief through the bankruptcy court. In many cases the creditor will not be able to get relief from the stay – especially if the debtor complies with the chapter 13 plan their lawyer will prepare.
You may be able to save your home. People who have a home often get behind in their monthly payments because of job loss, medical bills or other reasons. Chapter 13 allows you a comfortable way to pay the arrears. Instead of paying them all at once, you can pay them over a 3 to 5 year time period. You still have to make your monthly payments on a regular basis but the arrears are spread out over this longer 3-5 year time frame.
You may be able to eliminate some debt on your home. Many homeowners take out a second or even a third loan. If the total of all your loans is more than the value of your home, then these extra loans become unsecured loans. Secured loans mean if you don’t pay your bills, the creditor(s) can sell your assets/your home and get money through the proceeds of the sale.
But if your home isn’t worth enough to pay the loans, then these loans become unsecured. Essentially, these loans become like credit card debt which means you owe the money but the creditor can’t go against your assets – because you don’t have any assets.
Chapter 13 treats secured loans differently than unsecured loans. You have to pay the secured loans in full. Unsecured loans need only be paid based on the amount of your income. In many cases, unsecured loans are paid just a small percentage of what they are worth.
If you only have one mortgage but the mortgage is more than the value of the house, you may be able to renegotiate the loan up to the value of the house.
You may be able to save your car, tools and other assets. Chapter 13 allows you to pay off the arrears on the loans for these items over 3 to 5 years as long as you make the regular monthly payments. The payment concept is similar to the payment concept for paying off a home loan.
You may be able to substantially reduce your unsecured loans. Chapter 13 requires that the debtor list the sources of income and the necessary expenses for living such as shelter and food.
If you have any money left over, then you are required to use that money to pay off your unsecured debts. Many debtors have very little money left over after all the reasonable expenses are considered – especially if they are paying for a place to live (through a mortgage or rent) and transportation costs. Many debtors, in Chapter 13, only pay a percentage on the dollar for unsecured debts.
You may be able to reduce or eliminate interest payments. If the creditors don’t have a security interest and your disposable income is limited – you may be able to reduce or eliminate credit card interest and interest on tax obligations.
Chapter 7 may allow some of the remedies for less money and less time. If your main goal is to save your car, you may be able to enter into a reaffirmation agreement with the car finance company through a Chapter 7 bankruptcy.
This agreement lets you continue to keep the car provided you pay the monthly payments and address the arrears.
You may be pursuing a remedy that doesn’t work. It’s a wonderful goal to save your home. But sometimes your finances don’t allow it. It may be better math to let the house go and start over when your finances improve rather than continue to be squeezed by payments that make you choose between shelter and food or shelter and medications.
You continue to be in bankruptcy for 3 to 5 years. Any outstanding debts that you don’t pay through a payment plan won’t be discharged until that 3 to 5 year period is over.
There’s a lot more paperwork involved. When you file a Chapter 13, you have to complete a full petition – detail your income and expenses as well as your debt. You also have to prepare a plan to pay the arrears on secured assets and some money towards unsecured debts.
The legal fees are more. Because more work (and sometimes another hearing or two) is required, the fees for your lawyer will be more
Your wages may be attached to make sure the payments are made.
The Trustee takes a more active role in your financial affairs. If you’re self-employed, you have to pay the Trustee in bankruptcy on a monthly basis. The trustee also may require additional paperwork from you. He/she may also attach your tax refund.
Several hearings to satisfy creditors, the trustee and the bankruptcy judge may be required.
Keeping a Credit Card Out Of a Bankruptcy Filing
Many people filing for bankruptcy think that they can keep a particular credit card out of the bankruptcy filing as long as there is no balance on it. Technically, the credit card company is not a creditor if there is no balance on it so from that standpoint they are correct. Where the problem lies […]