If you’re receiving frequent phone calls from debt collectors, you’re behind on several different bills with no clear way of catching up, and you’re concerned about your wages being garnished, you’re probably considering filing for bankruptcy. We wanted to share the pros and cons of Chapter 13 bankruptcy so you have a better idea of what to expect and understand if this is the right step to help you get out of debt and improve your financial future.
Chapter 13 bankruptcy is also called a “wage earner’s bankruptcy,” because it allows you to pay off your debt and avoid losing property. During this process, your debts are gathered, including secured debt, like the amount you’re behind on your home or car, high-priority debt, like child support, and non-secured debt, like medical bills. Then, you determine your disposable income based on your area, income, and necessary expenses and submit a monthly payment amount to put toward your debt.
The court will review this repayment proposal, and your creditors can object, but it’s the court’s decision to accept or refuse it. If it’s accepted, you will pay this monthly repayment to a trustee who will then disperse it to your creditors based on the highest priority. After a period of 36 to 60 months, your high priority and secured debts should be caught up at the minimum, and most other eligible debts are discharged, freeing you from the obligation to pay.
Debts that are eligible to be discharged in Chapter 13 include:
Loans that can’t be discharged include:
Now that you have a better understanding of what Chapter 13 is, let’s look at the benefits you can expect by filing.
If you are behind on your mortgage, even if foreclosure proceedings have begun, Chapter 13 still gives you the chance to keep your home. Your past-due mortgage amount will be included in your repayment plan, so as long as you make that payment as well as stay current on your existing mortgage, you’ll keep your home. This also works for your vehicle so you don’t lose your car. Additionally, you may seek to participate in the Mortgage Mediation Modification program – a Bankruptcy court managed program for people looking to modify their mortgage loan.
For people with depreciating non-homestead property, such as a mobile home (that is not your homestead) or investment property, Chapter 13 offers the opportunity to “cram down” the payment to fair market value if you owe more than the property is worth. For example, if you owe $35,000 on a mobile home and it’s only worth $20,000, your repayment plan will be for the $20,000 plus a fair market interest rate over five years and when the repayment period has passed, you’ll own it outright. This saves you $15,000 plus interest. In the case of a car, the law requires that you must have owned the car for at least 910 days – this also referred to as the 910 rule.
If your debts include student loans or child support, Chapter 13 allows you to catch up more easily on these bills as the trustee will focus on making sure high-priority debts are paid off before non-secure debts.
Instead of making payments to multiple different creditors, medical bill companies, and more, you will instead only make one monthly payment to your creditors (aside from continuing to pay your mortgage and car loan if applicable.)
Once you file for bankruptcy, all attempts to contact you, sue, or garnish wages (with the exception of child support and student loans) must end. Instead of dealing with creditors, you’ll make a payment to your trustee who will pay your creditors on your behalf.
Now that you have a better idea of the pros of Chapter 13, let’s look at the downsides.
First, it’s important to note that while Chapter 7 bankruptcy has your debts settled within about four to six months, Chapter 13 is a much longer process. The repayment plan will range between three to five years, depending on how much you owe and your income.
If you have an acceptable repayment plan and you stop making payments, your trustee can file to have your bankruptcy dismissed. This will put you right back at square one when it comes to dealing with creditors. However, the monthly payment is designed to be affordable with your income, and if it looks like you are unable to meet this, you can see about having the repayment schedule adjusted.
While it’s shorter than the 10 years that Chapter 7 bankruptcy stays on your record, Chapter 13 stays on your credit for seven years. This can hurt your ability to rent an apartment, buy a car or take out a line of credit. However, as soon as you begin your repayment period, your credit score will begin the healing process and your other debts will no longer be present on your report, so you can gradually build a better score.
If you would like to learn more about Chapter 13 bankruptcy and see if it’s right for you, reach out to Stiberman Law in Florida today for a free consultation. Call us at (954) 922-2283 or fill out the form below to get started.
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