Individuals and married couples are eligible to file for Chapter 13 bankruptcy to reorganize their finances under the supervision and approval of the courts. Chapter 13, also known as a “wage earners plan” stipulates that debtors must follow through on a payment plan that pays outstanding creditors in three to five years.
According to data compiled by the United States Courts in a 12-year span from 2005-2017, there were 4.1 million Chapter 13 bankruptcies filed. On average that’s 341,000 Chapter 13 bankruptcies each year.
Bankruptcy offers a new opportunity for consumers unable to pay their debts, but there remain some key considerations that need to be taken account of when considering the Chapter 13 option.
Chapter 13 Bankruptcy Advantages
Chapter 13 bankruptcies are voluntary reorganizations and come with certain inherent advantages for those debtors looking to repay their debts via a court administered debt repayment plan. One of the key advantages is the ability to avoid foreclosure on your home, as well as being able to reschedule debts.
Some of the key issues are shown below and they should be balanced by those seeking the alternative before embarking upon them without due consideration of the consequences and various options that come with them.
Consider the following advantages when considering filing a Chapter 13 bankruptcy:
Unsecured debts like credit card bills, unpaid medical bills, old utility payments, past-due rent payments, and personal loans could be discharged or reduced when filing Chapter 13. Sometimes, depending on your financial status, courts arrange for these debts to be cleared by paying a smaller percentage of the total amounts due.
Domestic Support Payments
Domestic support obligations (DSO) like child support and alimony are non-dischargeable in a Chapter 13 bankruptcy however, past due payments could be included in a court-administered debt repayment plan. Including DSO payments in your Chapter 13 bankruptcy may prevent court sanctions and possible jail time due to delinquent DSO payments and Chapter 13 arrangements allow individuals to catch up on their payments.
Tax debts are normally unforgivable, however, there are some circumstances for older income tax debts. However, being able to stretch the repayment of these debts over the course of three to five years makes satisfying outstanding creditors more advantageous than before.
If your house is at risk of foreclosure, then filing Chapter 13 allows for you to be able to catch up on your missed payments over the course of several years instead of in one lump sum.
The Chapter 13 plan allows you to reorganize all of your debts so that you can afford to resume all of your regular mortgage payments again.
If your home’s second mortgage is worth less than what you owe on your first mortgage, then you can motion the court to have your second mortgage become an unsecured debt. Upon completion of your debt repayment plan, your second mortgage may be reduced greatly or discharged.
Chapter 13 Bankruptcy Disadvantages
Chapter 13 bankruptcies aren’t for everyone and it is vital that those seeking to use this option meticulously consider the pros and cons. Among the disadvantages:
- Timing: Chapter 13 bankruptcy repayment plans take three to five years to repay and that may be too long for certain individuals. The failure rate of Chapter 13 bankruptcies is relatively high for that reason alone and the need to keep to that lengthy timeframe and ensure all payments are made is a ‘killer’ for many. Chapter 13 bankruptcies can stay on your record for ten years.
- Credit score: Chapter 13 Bankruptcy comes with the risk of reducing your credit score by 100-200 points.
- Attorney fees: Chapter 13 Bankruptcy attorneys are required for filing and the statistics show that those applicants made without an attorney have a very low success rate. Chapter 13 filings tend to be more expensive than Chapter 7 attorneys. As we indicate on our site website many bankruptcy attorneys include their fees in your debt repayment plan and you can ‘spread’ your legal fees, but ensure that you know the quantum paid.
- Flexibility: Chapter 13 bankruptcy debt repayment plans are inflexible in most cases so working with an adept Chapter 13 bankruptcy attorney that understands your financial means and limitations is pivotal before filing. Since Chapter 13 stipulates that you are to pay all disposable income into your debt repayment plan, then payment increases will affect your payment arrangement as well.
- Worse financial position: In the event that the Chapter 13 case is dismissed your financial position can be substantially worse, as you remain liable for the balance of the debt due. In other words, your debt position has actually worsened.
Deciding to declare bankruptcy is obviously never an easy decision. As outlined briefly here, there are pros and cons. If Chapter 13 is being used to keep a business functioning then the process is even more concerning, with a range of legal and financial issues to think about.
One thing you do need however is a plan. That means collecting your documentation and putting it together and to then seeking appropriate financial and legal help from those who have experience in these areas.
It is important also not to be overwhelmed by your financial state. Make a plan with the best support you can get and then take action.
Stuart M Nachbar is a New Jersey-based bankruptcy attorney.