Advantages and Disadvantages of Filing Chapter 13 Bankruptcy
Information may be specific to Washington DC and Maryland
In a nutshell, Chapter 13 of the Bankruptcy Code allows individuals with regular income streams to develop a repayment plan that allows them to satisfy their debts. Debts are generally repaid over a period of three to five years, depending on the debtor’s current monthly income. Even if you feel that Chapter 13 bankruptcy is the right choice for you, you may want a bankruptcy attorney to evaluate your situation and explain the advantages of filing for bankruptcy to you.
Advantages of Chapter 13 Bankruptcy
Chapter 13 is often preferred over Chapter 7 bankruptcy. Although most debts are not automatically discharged under Chapter 13, as they are in Chapter 7 bankruptcy proceedings, both trustees and creditors tend to view Chapter 13 bankruptcy with more credibility. It also has less severe consequences on your credit rating. The most significant advantage of filing for Chapter 13 bankruptcy is that individuals are able to save their homes from foreclosure if they make the required mortgage payments due under the Chapter 13 repayment plan. Additionally, Chapter 13 allows debtors to reschedule secured debts so that they can repay the debt owed over the Chapter 13 repayment period.
When comparing Chapter 7 vs Chapter 13 bankruptcy, note that Chapter 13 has provisions that protect third parties, such as co-signers and guarantors, who face liability pursuant to the debtor’s consumer debts. Additionally, Chapter 13 requires that the debtor make payments to the trustee, who in turn makes distributions to the creditors. This allows a debtor to focus on simply repaying debt without having to endure calls from or directly contact creditors.
Disadvantages of Chapter 13 Bankruptcy
Filing Chapter 13 bankruptcy also has a number of downsides. Similar to Chapter 7 bankruptcy, Chapter 13 bankruptcy negatively impacts your credit score. However, while Chapter 7 bankruptcy remains on your record for ten years, Chapter 13 bankruptcy remains on your record for only seven years. But, the seven-year period begins when the debt is discharged, which is three to five years from the date of filing for bankruptcy. Additionally, while Chapter 7 bankruptcy is often complete within four to six months of filing a petition for bankruptcy, the Chapter 13 bankruptcy process is more extensive and takes years to complete.
Chapter 13 bankruptcy also has a negative impact on many additional monetary sums received during the repayment period. For example, lump sum distributions received from personal injury settlements or inheritances usually must be turned over to the trustee and distributed to the creditors. Likewise, any significant increases in normal income usually result in an increase in monthly payments to the trustee.
When to File for Chapter 13 Bankruptcy
First, you should realize the advantages and disadvantages of filing Chapter 13 bankruptcy. Then, it is important to understand whether Chapter 13 bankruptcy is the best option for you. Debtors often choose a Chapter 13 repayment plan in instances where they:
- Do not qualify for Chapter 7 bankruptcy
- Own their own home and wish to protect it from foreclosure proceedings
- Have a constant flow of income payments
- Are delinquent on mortgage or car payments
- Have liens that exceed the value of the secured assets
- Owe years of unfiled taxes
- Filed for Chapter 7 bankruptcy within the past eight years
If any of the above circumstances apply to you, Chapter 13 bankruptcy may be the right option for you. However, make sure you have explored all available options. Kevin D. Judd is an experienced Washington DC Chapter 13 attorney. He has worked on bankruptcy cases for the citizens of Washington DC and Maryland since 1994. He offers a free consultation, so you have nothing to lose by talking to him.