Chapter 13 bankruptcy allows you to keep your assets that might otherwise be subject to liquidation under a Chapter 7 bankruptcy filing. Chapter 13 may also be the kind of bankruptcy filing you must use if you cannot qualify to use Chapter 7 because of the means test.
Chapter 13 offers a number of other advantages if you are looking to get out from under crippling debt, but there are some disadvantages, too.
In this post, we consider the advantages and potential downsides of Chapter 13 bankruptcy in Arizona.
If you have any questions about Chapter 13 bankruptcy, call Stone Rose Law at (480) 739-2448 to talk with an experienced bankruptcy attorney.
Here are the key advantages of using Chapter 13 to get out of debt.
Especially if you have secured debts, like mortgage or car payments, Chapter 13 can allow you to keep them even if you have been falling behind on your payments. Your debt management plan can enable you to get caught up again, thereby avoiding default, foreclosure, or repossession
By contrast, a Chapter 7 bankruptcy can discharge the amount you owe under some secured debts, but if the creditor has placed a lien on the collateral, this discharge will not get rid of the lien, allowing the creditor to repossess the property. This means if you are in default after the Chapter 7 bankruptcy, the lender can repossess the asset or foreclose the property.
Many people who use Chapter 13 have income, but their current loan payments outstrip their ability to pay completely or on time. The court-approved debt repayment plan allows you to make reduced payments that fit within your income while paying down at least part of what you owe and setting a fixed period of time to pay.
Fairness is a key concept in a Chapter 13 payment plan. The regular payments made under the plan go mainly to priority debts like mortgages, car loans, taxes, and support obligations. What is left over pays off a fraction of lower-priority unsecured debts such as credit cards, medical bills, and personal loans.
If you owe a creditor more than you can pay back during the duration of the plan, when the plan ends, the balance of what you originally owed will be extinguished. The fairness here is that the creditor will likely receive more than it would have if you had discharged the debt completely under a Chapter 7 bankruptcy.
A Chapter 7 bankruptcy will stay on your credit report for 10 years after discharge.
A Chapter 13 only stays on your report for seven years. The reason for this is that under Chapter 13, you are perceived to have made a stronger attempt to repay your creditors, even if you cannot pay them back everything you owe.
If you complete your Chapter 13 debt repayment plan, but still owe debt that was not covered in that Chapter 13 bankruptcy, then you can file for Chapter 13 again. This could be new debts you acquired after filing or additional taxes.
Although this will mean that multiple Chapter 13 filings will appear on your credit report, this option is still available if you are still having trouble paying your debts.
Chapter 13 is not without its potential drawbacks.
Compared to a Chapter 7 bankruptcy, which you can usually complete in a few months, it will take you at least three years to complete a Chapter 13 and possibly up to five years to repay creditors.
Sticking with a debt repayment plan requires you to adhere to a budget and carefully manage your current monthly income. If you have trouble managing your financial affairs, and this prevents you from complying with the terms of the payment plan, this could jeopardize your ability to have your case closed by the bankruptcy court.
Your debt repayment plan will also take most of your disposable income; there will be little left over to allow for things like vacations or buying non-essential new items on credit.
Also, if you lose your source of steady income or incur significant additional debts, like unexpected medical bills, this could also complicate your ability to comply with your payment plan terms. However, there is always room to make modifications to your Chapter 13 plan. Life happens over the three to five years; your plan can be modified to reflect the changes. Examples of changes include family growth, loss of employment, unforeseen expenses, or the need for financing new assets.
During Chapter 13, you will qualify for credit cards, personal loans, and lines of credit shortly after filing. However, you cannot reduce plan payments to accommodate these new debts.
If you are seeking to buy a new home, you must meet the qualifications to do so. This means credit recovery, available income, and down payment. It generally takes two years after filing to qualify. You must also seek court or trustee approval of the purchase, depending on your jurisdiction.
If you are looking to finance a new car, it must be presented for approval from the Court or Trustee, depending on your jurisdiction. The approval order or letter is required for the lender to close on the loan. The new purchase and debt must be justified. It must not prejudice your creditors-impact your ability to pay your plan payment. And it must fit your monthly budget. Upon approval, it could mean a potential modification or amendment to your Chapter 13 plan.
This process ensures your success through bankruptcy. It forces you to review your budget and plan beyond your bankruptcy.
If the bankruptcy court dismisses your Chapter 13 before you complete your payment plan, as can happen if you have missed payments, then the following consequences can happen:
Although your credit report will be affected for less time than a Chapter 7 bankruptcy, under a Chapter 13 bankruptcy, you will still have to wait for seven years before the bankruptcy is removed from your credit report.
Some debts are nondischargeable no matter what form of bankruptcy you use. These include:
The main feature of Chapter 13 bankruptcy is its use of a court-approved repayment plan based on monthly payments to pay your secured and unsecured creditors all or some of what you owe them.
Unlike a Chapter 7 bankruptcy, which discharges many, if not all, of your consumer debts in a relatively short period of four to six months, the Chapter 13 payment plan takes three to five years to repay debts.
Once you successfully complete your structured repayment plan, any leftover debt is discharged.
As mentioned above, a second distinguishing feature of Chapter 13 compared to Chapter 7 is that under Chapter 13, you can keep some assets that you might have to surrender to the trustee in bankruptcy for liquidation sale under Chapter 7.
Filing a bankruptcy petition under Chapter 13 can offer you several key advantages, especially if your income exceeds the means test for Chapter 7, or you have considerable assets to protect from liquidation, or have missed mortgage or other secured loan payments.
If you need clear, easy-to-understand legal advice about what your best bankruptcy option is, an experienced Stone Rose Law Chapter 13 bankruptcy attorney can give you the guidance you need. We will go over your financial situation with you, explain the bankruptcy legal process, and help you throughout your bankruptcy case if you decide to file.
You can call us at any time at (480) 739-2448 or use our online contact form to talk with one of our Arizona bankruptcy lawyers and to schedule a free consultation.
Don’t let crushing debts interfere with your life. Call Stone Rose Law today.
