Pros and Cons of Chapter 13 Bankruptcy

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. 

The process is not about eliminating debt, but rather about reorganizing financial arrangements to deal with debt. 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. 

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. The eligibility to use Chapter 13 applies only if debts are below certain limits, being $419,275 for unsecured debt and $1,257,850 for secured debt (as of February 2019).

The increases that are imposed will occur in three year cycles and those filing must also have completed credit counseling to be considered eligible for Chapter 13

Below are the advantages when considering filing a Chapter 13 bankruptcy:

Unsecured debts

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

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. 

Home Foreclosures

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. 

Second Mortgage

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 come with the following disadvantages:

• Timing: Chapter 13 bankruptcy repayment plans take three to five years to repay and that may be too long for certain individuals. 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 tend to be more expensive than Chapter 7 attorneys. According to the website www.snanj.com/chapter-13-bankruptcy-law/, many bankruptcy attorneys include their fees in your debt repayment plan. 
• 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. 

Keep in mind when filing a Chapter 13 case that you need to prove to the court that you are able to meet your monthly household obligations and to pay also into the payment plan proposed. A low or an irregular income will not permit the repayment plan to be accepted and so it needs to be properly throught through and presented.

However Chapter 13 is an ideal arrangement to reorganize your financial situation and a key weapon in the arsenal of debt management.

Source:

Stuart M Nachbar is New Jersey-based attorney who specializes in bankruptcy and personal injury law. See more information about the firm here.