Advantages and Disadvantages of Chapter 13 Bankruptcy

In most situations, filing for bankruptcy should be the last option available for you. Once you decide to file, you must determine what type of bankruptcy will work best for you. Depending on their financial situation, most individual debtors file for either Chapter 7 or Chapter 13. For people who owe a lot of debt and have assets they want to protect, Chapter 13 may be the best option. In a Chapter 13 bankruptcy case, the debtor proposes the plan, the Chapter 13 trustee reviews it, and the court confirms. You begin making plan payments 30 days after filing.

While Chapter 13 bankruptcy is a viable option for many people facing foreclosure, repossession, and legal action, it has drawbacks. This article explains how a Chapter 13 bankruptcy case works and how Chapter 13 differs from Chapter 7 bankruptcy. It also examines the advantages and disadvantages of filing for Chapter 13 bankruptcy.

Chapter 13 vs. Chapter 7

Most individuals who file for bankruptcy opt for either Chapter 7 or Chapter 13. There are other types of bankruptcies, but they are rarely a good fit for individual filers. When deciding which chapter to file, you and your bankruptcy attorney should consider both options and choose the one that will best help your financial situation.

Before you decide to file for Chapter 13, you should familiarize yourself with the differences between Chapter 13 and Chapter 7 bankruptcy.

The primary difference between a Chapter 7 and Chapter 13 bankruptcy is that a Chapter 7 bankruptcy results in a discharge of your debts. You do not have to repay them, and the creditors cannot pursue further debt collection activity.

With Chapter 13 bankruptcy, you repay your debts over three to five years. The bankruptcy trustee will approve a repayment plan, and you must adhere to the payment schedule.

Some of the other differences between Chapter 7 and Chapter 13 include the following:

• A Chapter 7 bankruptcy case is over within a few months, while a Chapter 13 bankruptcy case lasts between three and five years
• Filing for a Chapter 13 costs more than a Chapter 7
• Chapter 7 requires an individual to pass the means test, while sufficient income is needed for a reasonable payment plan in a Chapter 13 filing
• Debtors liquidate their non-exempt assets to pay their creditors in a Chapter 7, while those under Chapter 13 protect their assets and promise to repay debts according to their plan

There are other differences between the two chapters. A bankruptcy lawyer can fully explain the bankruptcy laws of your state and how they will impact your decision to file.

An Overview of the Pros and Cons of Chapter 13 Bankruptcy

There are advantages to filing a Chapter 13 bankruptcy, but they are balanced by negative aspects as well. These are some things you should consider before choosing whether to file a Chapter 13.

Meeting with a debt relief agency or credit counseling agency usually precedes any bankruptcy filings, which helps determine which type, if any, is best for you. It’s never too soon to learn about the pros and cons you’ll encounter.

Advantages of Chapter 13 Bankruptcy

The following factors may make a Chapter 13 bankruptcy your best option. Whether you can qualify for this type of bankruptcy will depend on your disposable income, total debt, and specific debts. If the trustee determines that you cannot afford the monthly payments, they will not approve your Chapter 13 bankruptcy petition.

If you have many secured debts, Chapter 13 may be a good solution. If you have mostly unsecured debt, consider a Chapter 7 bankruptcy instead. Regardless of which one you select, filing for bankruptcy will have an major effect on your life.

The following are some of the advantages of filing a Chapter 13 bankruptcy case:

• A Chapter 13 gives you more time to pay off large debts
• Once you complete a repayment plan under Chapter 13, individual creditors can’t force you to pay them in full
• You keep your property while you’re making payments on your secured debt in a Chapter 13 plan
• A Chapter 13 bankruptcy will stay on your credit report for years, but it doesn’t look as bad as multiple charge-offs, repossessions, and lawsuits
• A Chapter 13 won’t hurt your credit score as much as a Chapter 7 bankruptcy
• Declaring bankruptcy now can get you started on rebuilding your credit sooner
• You can file for Chapter 13 plan multiple times, but serial filings can limit the automatic stay and courts may dismiss for bad faith
• If you cannot afford your mortgage payments, a Chapter 13 can help you prevent foreclosure
• In rare instances involving undue hardship in an adversary proceeding, some student loans can be dismissed

There are other advantages as well, but be aware that any bankruptcy will negatively affect your credit rating.

Disadvantages of Chapter 13 Bankruptcy

While there are many advantages of filing for Chapter 13 bankruptcy, it’s not a magic fix. The following are just some of the downsides of filing for Chapter 13:

• It can take anywhere from three to five years to complete your payments under a Chapter 13 plan
• Your credit report will show a Chapter 13 for up to seven years in most instances
• You’ll likely lose all your credit cards
• Bankruptcy can make it nearly impossible to get a mortgage if you didn’t already have a first mortgage
• You can’t file for Chapter 7 bankruptcy if you filed a Chapter 13 in the last six years
• Declaring bankruptcy under Chapter 13 can make it harder to file Chapter 7 case later
• Chapter 13 bankruptcy will not relieve you of your obligations to pay child support, alimony, or student loan debt
• You may still have to pay some debts, such as a mortgage lien, unlike after a Chapter 7 bankruptcy discharge

You must let your bankruptcy lawyer know if there are any co-signers on your debts. The decision to file Chapter 13 will impact them as well.

Disclaimer: Bankruptcy and banking laws change frequently due to new legislation, higher court rulings, and other means. While FindLaw strives to provide readers with the most current information, we recommend you consult a local bankruptcy lawyer to confirm the current laws.

An Attorney Can Help With the Chapter 13 Bankruptcy Process

Once you’ve weighed the advantages and disadvantages of Chapter 13 bankruptcy, you’ll be better equipped to make a decision. If creditors are calling and knocking on your door, it might be time to make a move. Consult an experienced bankruptcy attorney for solid legal advice and help with making a financial recovery.

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