Chapter 13 bankruptcy is a wonderful tool that indebted individuals can use to reorganize and pay off their debts. With any type of bankruptcy, it’s important to thoroughly understand the advantages and disadvantages of a Chapter 13 filing. That’s where having a knowledgeable attorney can make the difference. If you’re struggling with debt and want to know what the best strategy for handling it is, count on the professionals of Toronjo & Prosser Law. We can review your financial situation and help you decide whether Chapter 13 is right for you.
Understanding Chapter 13 Bankruptcy
Chapter 13 is sometimes called a reorganization bankruptcy. It allows a debtor to reorganize what they owe and pay it off according to a 3-5 year repayment plan submitted to the court. In addition to the extra time to pay off the debt, a Chapter 13 filer gets to keep their property rather than having to liquidate it. There are multiple ways to make payments under the repayment plan, but it’s important that you don’t miss any. That means the debtor should have reliable income in a sufficient amount to make those payments.
With these basics in mind, consider some of the advantages and disadvantages of Chapter 13 bankruptcy.
The Pros
These are a few of the reasons you might want to choose a Chapter 13 bankruptcy:
Getting your creditors to leave you alone. As soon as you file for Chapter 13 bankruptcy, an automatic stay goes into effect that prevents creditors from taking collection actions against you. That includes any activity that has already commenced, like foreclosure proceedings. Repossessions, garnishments, evictions, lawsuits, phone calls, and letters also must stop.
Keeping your property. As mentioned above, and provided you stay on the repayment plan, you get to keep your property instead of having to sell it off (liquidate it) to pay your debts. This is especially beneficial for people with certain debts, like a mortgage, that are secured by a property.
Longer period of time to pay the debt off. One major reason debtors choose Chapter 13 bankruptcy is that they are allowed to pay off their debts over a 3-5 year period. That may be more time than they already had to pay those debts. During this time, a debtor can get control of their finances, learn how to budget, and potentially avoid falling back into the same situation later.
May reduce the amount of debt you owe. The repayment plan includes any secured debts, like a house or car. These will typically have to be paid in full. After doing so, any leftover income will be applied to unsecured debts like medical bills, personal loans, and credit cards. Many debtors are able to pay back a reduced amount on these unsecured debts or eliminate them entirely.
The Cons
An experienced bankruptcy attorney can help you weigh the pros of Chapter 13 against the cons, such as:
Not all debts will be eliminated. Chapter 13 bankruptcy can help you get rid of various kinds of debts, but not all of them. Alimony, child support, student loans, and certain tax debts won’t be eliminated, so you will still owe these as well as any back amounts.
Impact on your credit score and credit report. You should expect a drop in your credit score if you file for Chapter 13 bankruptcy. Your bankruptcy will also stay on your credit report for up to 10 years. While these are not desirable outcomes, they may be better than the alternative of having multiple judgments, defaults, repossessions, and other collection activities on your record.
More difficult to get a mortgage. Unless you already have a mortgage, it will be hard for you to get one in the future. Many debtors are not concerned about this in the present but may wish to acquire a mortgage down the road (we’ve had several clients get approved for mortgages while in chapter 13).. It’s important to have an attorney review your individual financial situation and provide advice based on your goals.
Requires commitment. Remember, Chapter 13 requires you to agree to a 3-5 year repayment plan. During this period, any extra money you earn will have to be used to pay the debt. That means other than basic necessities, don’t expect to have anything left over for luxury items. Of course, the upside of this is that it will allow you time to practice financial discipline and rebuild your credit.
We’re Ready To Review Your Bankruptcy Options Today
There are additional considerations you should know about before deciding how best to handle your debt. You deserve a trusted bankruptcy attorney who will evaluate your exact financial circumstances, advise you of your options, and then get to work executing a plan that’s customized just for you. Tired of being burdened by your debt and harassed by creditors? Give us a call at Toronjo & Prosser Law now.