Chapter 13 Bankruptcy: Pros and Cons You Need to Know
Chapter 13 Bankruptcy allows you to keep your property while repaying debts over three to five years. You stop foreclosure, reorganize secured debts, and protect co-signers. However, you'll sacrifice disposable income during repayment, and bankruptcy remains on your credit report for ten years.
Get Free ConsultationYou can free yourself from unmanageable debt. Your life can change when you regain your financial health. Filing for bankruptcy might be your answer.
For individuals, married couples, and small businesses, bankruptcy relief is a tough decision. You may have many questions before and during an active case. While everyone wants to pay their debts, not everyone can.
Speak With a Bankruptcy Attorney for Free
Chapter 13 bankruptcy has complex filing restrictions and debt limits. A qualified attorney can review your specific situation and help you avoid mistakes that limit future options.
Check Chapter 13 EligibilityYou need the right information to make the best decision for your family. Understanding Chapter 13 Bankruptcy helps you move forward with confidence.
What Is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is also called a wage earner’s plan. You develop a repayment plan for all or part of your debts. With a regular salary, you propose how you will pay creditors over three to five years.
Your plan duration depends on your monthly income. If you earn less than your state’s median income, your plan lasts three to five years. If you earn more than the median, the plan must last five years. The law prohibits creditors from collection efforts during this period.
Chapter 13 differs from Chapter 7 Bankruptcy in important ways. You keep your property and follow a repayment plan. Your money goes toward your most important debts first.
Priority debts include your mortgage, car loan, support obligations, and taxes. A fraction of remaining debt covers credit card balances, medical bills, and utility bills.
Chapter 13 Bankruptcy also allows you to:
- Keep all your property
- Avoid vehicle repossessions and foreclosures
- Pay the fair market value for your cars
- Stop bank levies, wage garnishments, and lawsuits
The Pros of Chapter 13 Bankruptcy
Chapter 13 offers powerful protections for people with regular income. You gain specific advantages that can save your assets and reduce stress.
You Can Stop Foreclosure and Keep Your Home
Filing Chapter 13 stops foreclosure proceedings immediately. You can cure delinquent mortgage payments and save your home. You must still make all mortgage payments that come due during the plan on time.
You Can Reorganize Secured Debts
You can reorganize secured debts during Chapter 13. Exceptions include a mortgage on your primary residence. Extending the repayment period may lower your monthly payments significantly.
Co-Signers Get Protection
The Bankruptcy Code includes special provisions protecting co-signers. Your co-signers are shielded from creditors on consumer debts. Family members who helped you won’t face collection actions.
You Make One Simple Payment
Chapter 13 consolidates all your debt into one payment. You pay a Chapter 13 trustee who distributes funds to creditors. Creditors cannot contact you directly when under Chapter 13 protection.
You Can File Again If Needed
You can file for Chapter 13 again if circumstances require it. Each filing appears on your credit report. Within one to three years of filing, you may obtain new credit lines.
Some creditors specialize in lending to people rebuilding credit. Interest rates will be higher initially. Our partner Kikoff can help you rebuild credit after bankruptcy.
You Get Final Discharge Protection
Individual creditors cannot legally require full payment after you complete your repayment plan. Your discharge eliminates remaining eligible debts. You get a true fresh start.
The Cons of Chapter 13 Bankruptcy
Chapter 13 has drawbacks you must understand. Weighing these disadvantages helps you make an informed decision.
The Repayment Period Is Long
You must repay debts for three to five years. Your entire repayment process locks up your extra cash. You must pay all your disposable income toward debts.
Disposable income is what remains after necessities like food, shelter, and medical care. You won’t have flexibility for unexpected expenses during this period.
Some Debts Cannot Be Discharged
Bankruptcy doesn’t eliminate alimony and child support obligations. Student loans also survive bankruptcy in most cases. The automatic stay stops aggressive collection actions on student loans temporarily.
Your Credit Takes a Major Hit
Bankruptcy stays on your record for ten years. Your credit cards are canceled immediately. Future lenders will see the bankruptcy on your credit report.
Missed payments, defaults, and repossessed properties damage your credit severely. Explaining bankruptcy to future lenders can be difficult.
Filing Restrictions Apply
You cannot file for Chapter 7 bankruptcy within six years of filing Chapter 13. You cannot file for Chapter 13 if you were dismissed from a case within 180 days.
Dismissal reasons include violating a court order or requesting dismissal after a creditor sought relief. An exception exists if you paid 70% or more of unsecured debts in good faith.
Debt Limits Apply to Chapter 13
You must meet specific debt thresholds to qualify. Your unsecured debts must be less than $394,725. Your secured debts must be less than $1,184,200.
Consumer price index changes periodically adjust these amounts. You need to verify current limits before filing.
Who Qualifies for Chapter 13 Bankruptcy?
Employees, sole proprietors, and any individual may qualify for Chapter 13 relief. You must have regular income to fund a repayment plan. Your debt levels must fall within statutory limits.
Small business owners operating unincorporated businesses can file. Corporations and partnerships cannot use Chapter 13. They must use Chapter 11 bankruptcy instead.
How Chapter 13 Offers a Fresh Start
Compliance with all court orders protects your bankruptcy rights. Don’t request dismissal when creditors seek relief from the stay. Following court rules prevents severe limitations on future filings.
You have six months to reapply if your case is dismissed. Speaking with a bankruptcy attorney for free ensures you won’t limit your options later.
Some debts may survive bankruptcy proceedings. Mortgage liens remain on your property even after discharge. Understanding which debts survive helps you plan effectively.
Alternatives to Bankruptcy Worth Exploring
Responding to debt collectors quickly gives you more time. You can explore options outside of bankruptcy. Debt settlement or negotiation may resolve your situation.
Credit counseling programs can help you manage payments. Debt management plans consolidate payments without bankruptcy’s severe consequences. You preserve more of your credit rating.
If you’re facing a debt lawsuit, acting fast protects your rights. Our partner Solo helps you respond to debt collectors and lawsuits effectively.
Making the Right Decision for Your Family
Chapter 13 Bankruptcy offers powerful debt relief for people with regular income. You can keep your property and stop foreclosure. You consolidate payments and get protection from creditors.
The disadvantages include a long repayment period and credit damage. Some debts cannot be discharged. Filing restrictions may limit future options.
Consulting a bankruptcy attorney helps you understand your specific situation. You can weigh the pros and cons based on your circumstances. Professional guidance ensures you make the best choice for your future.