When thinking about a personal bankruptcy, the average person considers a Chapter 7 filing in the United States. The Chapter 7 wipes away most, if not all, unsecured debts. In a Chapter 13 bankruptcy, the debts are restructured so that they can be easier to pay with current income levels. It encourages a negotiation with a person’s creditors under the protection of the court so that individual finances can get pact into order.
Here are the Chapter 13 bankruptcy pros and cons to consider if you’re thinking about restructuring your debts so that they can be paid off in a more effective way.
The Pros of a Chapter 13 Bankruptcy
1. It requires creditors to immediately stop calling on past due debts.
The protection of the courts during a bankruptcy case means that no collection attempts on your debts can be made. For people who have collection agents calling at all times of day, this can immediately improve their quality of life. Imagine not having an 8am phone call every day from the same creditor demanding payment when there’s no money to make a payment? This eliminates many of the stresses that people experience with debt.
2. Individuals under a Chapter 13 bankruptcy get to keep their property.
As long as payments are being made on a debt under this bankruptcy chapter, the property that is owned because of the debt is allowed to be held. This means there is no risk to a home, a vehicle, or other items as long as the agreed upon payments can continue to be made. Sometimes the debt can even restructured so that the monthly payments [or other payment structure] can be less of a burden as well.
3. It streamlines a credit profile.
Although a Chapter 13 bankruptcy can have a dramatically negative effect on a credit report for up to 10 years, it also streamlines the debt. A bankruptcy makes a lot more sense to lenders during the Chapter 13 process than a having multiple debts, judgments, and/or repossessions on a credit file. Every negative item has a negative impact on a credit score, so it is entirely possible that the Chapter 13 bankruptcy could improve certain credit reports depending on the debt situation.
4. You can file for an additional Chapter 13 bankruptcy if an emergency happens.
Unlike the timing restrictions that are involved with a Chapter 7 bankruptcy, individuals can file for a Chapter 13 bankruptcy whenever they need to do so. Each filing appears on an individual’s credit record and has a negative impact, but this tool can be used to effectively manage debt that doesn’t work with the amount of income that is coming in.
5. It doesn’t stop family payment obligations.
Depending on the individual perspective, this could be considered a negative as well. Alimony and child support orders are generally considered to be a secured debt. This means that they will remain enforced even through the bankruptcy period. The Chapter 13 can help to restructure other debts to take care of these court-ordered payments, however, so the obligation becomes easier to meet.
6. The amount of debts that can be relieved may be unlimited.
For individuals who don’t have secured debts that survive a Chapter 13 bankruptcy, the amount of debt relief that can be experienced is virtually unlimited.
The Cons of a Chapter 13 Bankruptcy
1. It may take up to 5 years to repay the restructured debts under this bankruptcy plan.
Debtors can negotiate with their creditors for debt forgiveness, but the fact remains that most debts tend to be repaid under this bankruptcy plan. It may take up to 5 years to emerge from this bankruptcy and this can make it difficult to make a big ticket purchase, like a new vehicle, during that time because you’ll have virtually no access to new credit.
2. All of an individual’s extra cash gets tied up in the Chapter 13 bankruptcy.
In a Chapter 13 bankruptcy, all of a person’s life necessities are met. This includes food, a home, transportation to and from work, and medical care to name a few items. Any disposable income after those necessary expenses, however, goes directly to paying off the debt that has been restructured. Until that debt gets paid off, there won’t be many long vacations or other new luxuries enjoyed.
3. All credit cards are lost during the Chapter 13 bankruptcy.
Credit cards are the #1 unsecured debt issue that gets people stuck needing to file for a bankruptcy as it is. Not having them may be considered an advantage to some instead of a negative. Most people are able to apply for a new line of credit to begin rebuilding their credit profile after a Chapter 13 bankruptcy in 3 years or less, so it isn’t a forever circumstance. There will be higher interest rates for quite some time afterward, but that is the cost of a bankruptcy.
4. It will not get rid of most student loan debt.
Many people file for a Chapter 13 bankruptcy because they believe they’ll be able to get a break from their student loans. Although the payments can be restructured, they aren’t going to go away. It’s considered a secured debt, so even a Chapter 7 bankruptcy won’t get rid of it. Most lenders will allow for the payments to be restructured without the need for a bankruptcy anyway, so it may be more beneficial to contact the lender before filing for a Chapter 13 if student loans are the primary debt issue.
5. It requires a level of personal responsibility to the debt that can be uncomfortable.
In order for the Chapter 13 bankruptcy to proceed, those who are filing for protection will have to discuss why they got into debt with either a judge or a bankruptcy trustee. Admitting financial mistakes can be extremely difficult to do, but it should be pointed out that just about every judge or trustee has heard a story that is likely worse than the one that needs to be personally told.
6. Getting a mortgage will be virtually impossible.
Unless there’s already a mortgage in place, most lenders will not supply a new mortgage to individuals with a Chapter 13 bankruptcy on their credit record.
The Chapter 13 bankruptcy pros and cons show that this type of filing will help to make debt more manageable, but it won’t make as many debts completely disappear. This type of filing is typically more expensive than a Chapter 7, but it doesn’t have the same filing restrictions, so it can be used whenever it is needed. By evaluating each key point, it becomes easier to decide if this is the right financial move to make.