The Pros and Cons of Chapter 13 Bankruptcy

Dena Standley | August 08, 2023

Dena Standley
Legal Expert, Paralegal
Dena Standley, BA

Dena Standley is a seasoned paralegal with more than 20 years of experience in legal research and writing, having received a certification as a Legal Assistant/Paralegal from Southern Technical College.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: If you're considering filing for bankruptcy, review SoloSuit's guide on Chapter 13 Bankruptcy to know if it's the best option for you and your family.

Imagine if you could free yourself from unmanageable debt. Can you picture what your life would be like if you could regain your financial health? Filing for bankruptcy might be the answer. You can recover your financial stability.

For individuals, married couples, and small businesses, seeking bankruptcy relief can be a tough decision. You may have many questions before the process begins and during an active case. While everyone wants to pay their debts, not everybody can do so. A debt that once seemed manageable may no longer be so.

This article provides the information you need to make the right decision for you and your family if you consider Chapter 13 Bankruptcy. We'll explore Chapter 13, its advantages, and its disadvantages below.

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What is Chapter 13 Bankruptcy?

Also called a wage earner's plan, a chapter 13 bankruptcy is one of the various ways you can file for bankruptcy. With Chapter 13 Bankruptcy, you have a regular salary, and you use it to develop a repayment plan for all or part of your debts with an attorney's help. As part of this chapter, you propose a repayment plan that shows how you will pay your creditors over three to five years.

If you earn less than the applicable state median depending on where you live, your repayment plan will last for a minimum of three and a maximum of five years unless the court decides otherwise. If your monthly income exceeds your state's average, the plan must last five years. Plan payments may not exceed five years as per rule 11 U.S.C. § 1322(d). In this plan period, the law prohibits creditors from any collection efforts.

Unlike Chapter 7 Bankruptcy, Chapter 13 Bankruptcy offers unique debt solutions. If you decide to file for Chapter 13 Bankruptcy, you will have a repayment plan. The money will go toward your most important debts—like your mortgage, car loan, support obligations, and taxes. A fraction of your remaining debt will go to credit card balances, medical bills, and utility bills.

Chapter 13 Bankruptcy also allows filers to:

  • Keep all your property
  • Avoid vehicle repossessions and foreclosures
  • You pay the fair market value for your cars
  • Stops bank levies, wage garnishments, and lawsuits

These are the pros and cons to Chapter 13 Bankruptcy

Pros of Chapter 13 Bankruptcy

  • By filing Chapter 13, you can stop foreclosure proceedings and cure delinquent mortgage payments, possibly saving your home from foreclosure. But you must still make all mortgage payments that come due during the chapter 13 plan on time.
  • You can reorganize secured debts (except a mortgage on the primary residence) during chapter 13 and extend its repayment period. It may cause lower monthly payments.
  • The Chapter 13 Bankruptcy Code includes a special provision protecting third parties liable to you for "consumer debts." This provision may apply to your co-signers.
  • Chapter 13 consolidates all your debt. Then you make payments to a chapter 13 trustee who distributes the funds to your creditors. You are protected from direct contact with creditors when under chapter 13 protection.
  • It is possible to repeatedly file for a chapter 13 plan, but each filing will appear on your credit report.
  • Within one to three years of filing bankruptcy, you may be able to obtain new credit lines but at much higher interest rates. Some creditors can lend to "bad risks."
  • Individual creditors cannot legally require you to pay them in full if you complete a Chapter 13 repayment plan.

Cons of Chapter 13 Bankruptcy

  • Chapter 13 repayment plans require you to repay your debts for a long time, between three and five years
  • You must pay your debts your "disposable" income–what remains after necessities (food, shelter, medical care) are met. Meaning the entire repayment process locks up your extra cash.
  • Except for a court order from a family court, bankruptcy doesn't get rid of alimony and child support obligations. Bankruptcy doesn't take away student loans but will stop your lenders from taking aggressive collection actions.
  • Bankruptcy stays on your record for years; missed payments, defaults, repossessed properties, and lawsuits could all damage your credit and prove more difficult to explain to a future lender.
  • If you have filed for chapter 13 within the last six years, you cannot file for Chapter 7 bankruptcy. In case you are dismissed from a Chapter 7 or Chapter 13 case within the last 180 days, you cannot file for Chapter 13 bankruptcy because you: 1) Violated the court order or 2) Requested a dismissal after a creditor requested relief from the automatic stay—A motion to lift a bankruptcy stay is a lawsuit filed by a creditor against a debtor. It aims to help a creditor reclaim the collateral. It allows a creditor to recoup a car or other collateral surrendered during bankruptcy proceedings. If a creditor cannot lift the stay orders, they cannot reclaim collateral from the debtor. You won't be subject to the six-year bar, though, if you obtained a Chapter 13 discharge in good faith after paying 70% or more of your unsecured debts.
  • Your credit cards are canceled.
  • You can expect your Chapter 13 bankruptcy to remain in your credit report for ten years. From First Progress credit card complaints online, on a website like BBB.org, you can expect to have a back and forth before they help with Debt Validation or remove it from your credit report even after ten years.

If you are employed, operating an unincorporated business or, any individual may qualify for chapter 13 relief, so long as their unsecured debts are less than $394,725 and secured debts are less than $1,184,200—11 U.S.C. § 109(e). Consumer price index changes periodically adjust these amounts.

Chapter 13 Bankruptcy offers you a fresh start

If you comply with all court orders and court rules and do not ask to have your case dismissed when your creditors request relief from the stay, you can avoid these severe limitations against filing or re-filing for bankruptcy.

You have six months to reapply. Talk to an attorney when filing for bankruptcy to ensure you won't limit your options later. Even after bankruptcy proceedings are over, you may still pay some debts, including mortgage liens.

Responding to debt collectors quickly and effectively gives you more time to explore options outside of bankruptcy. Visit SoloSuit for valuable information that may help you avoid bankruptcy.

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