Before we discuss the merits and drawbacks of declaring Chapter 13 bankruptcy, we should first take an in-depth look at it. Chapter 13 bankruptcy (which is sometimes called a “wage-earners plan”) allows individuals who earn a regular income to repay their debts, in whole or in part, to creditors over a period of three-to-five years. During this period, creditors are legally forbidden from commencing or continuing collection activities such as wage garnishments, lawsuits, foreclosure proceedings, and so on.
Any individual — including those who are self-employed or who operate an unincorporated business — may file for chapter 13 bankruptcy, provided that their unsecured debts are less than $394,725, and their secured debts are less than $1,184,200 (these figures are periodically revised based on inflation).
Chapter 13 Bankruptcy: Pros
Chapter 13 bankruptcy protection offers significant advantages, including:
- Provided the person filing makes all payments per the court-approved repayment plan, individuals can stop foreclosure proceedings on their home, and may also remedy overdue mortgage payments over time.
- Individuals can seek to reschedule their secured debts (except for the mortgage on their primary residence) over the life of their repayment plan, which typically lowers the amount of each payment and makes them more affordable.
- Third-parties (e.g. co-signers) may be protected on some consumer debts.
- Individuals do not have to engage in direct contact with creditors at any time. All communication and payments are managed by the court-appointed trustee.
Chapter 13 Bankruptcy: Cons
Naturally, there are some disadvantages of filing for chapter 13 bankruptcy as well. These include:
- The repayment plan must be supported by disposable income. This means that while the next few years will be lean rather than luxurious.
- A chapter 13 filing will remain on an individual’s credit score for 10 years (however, contrary to popular belief, this is not a financial catastrophe — click here to learn more).
- Not all debts can be restructured, such as alimony, child support and student loans (this limitation also applies to a chapter 7 filing).
- Some debts may survive the filing after the case is closed (e.g. mortgage liens).
- A chapter 13 filing is more complex than a chapter 7 filing, and as such legal fees are relatively higher.
To learn more about the pros and cons of chapter 13 bankruptcy, and for a confidential consultation on whether filing is in your best long-term financial interest, contact the Law Office of Charles H. Huber today. We have been filing consumer bankruptcy cases for more than 30 years. Our experience is your advantage!