Advantages and Disadvantages of Chapter 13

Filing Bankruptcy under Chapter 13 has numerous benefits, perhaps the most obvious of which is that you do not have to forfeit any of your property. There is also no requirement to offer collateral for this type of consolidation, which means that the equity that you do have is not put at (further) risk. Once you have filed under Chapter 13, the bankruptcy court issues an “automatic stay” which has the effect of stopping nearly all creditors from seeking payments from you. If you are risking foreclosure or other types of repossession, this has the effect of giving you time during which time you can work out a way to keep your assets and repay arrears within a fixed period of time.

In essence, Chapter 13 allows a debtor to consolidate their debts and pay a single monthly payment over a three or five year period. The debts that can be included in the payment plan include tax arrears, mortgage arrears and child support, which cannot be incorporated under other types of consolidation. Secured debts take priority over unsecured debts, which means that mortgage and automobile payments are given preference over credit cards, medical bills etc, that are paid once the debts with higher priority are paid off.  Creditors must file a claim at court in order to be eligible for payments during the consolidation period. If they have failed to do this, but you complete the plan under your Chapter 13 bankruptcy, then the debt is eliminated and you don’t have to pay it back.

As long as certain requirements are met, the total amount of unsecured debt owed by an individual can be vastly reduced. Once the bankruptcy term has expired, the debts that are dischargeable will expire. If a debtor had used a different method of debt consolidation not only would the full amount of the debts be repayable, but the time it takes to repay the debts would be considerably longer than under Chapter 13.

However, rather than simply removing debts under for example Chapter 7, Chapter 13 allows a debtor to demonstrate to their creditors that they have tried to address debt problems. This is a better option in terms of the way it is reflected on your credit report.

Disadvantages of Chapter 13

It is important to remember that although Chapter 13 provides an ability to consolidate debts, it does not erase them. You will still have to pay your debts. The term of a Chapter 13 bankruptcy requires a debtor to be “in bankruptcy” for a period of three years at least, whereas the entire process can be concluded under Chapter 7 in a matter of months (usually within four).  If, while in bankruptcy, you receive a large payment this will in most circumstances have to be paid to the U.S. trustee. This could include significant sums, such as money received through an inheritance.

In addition, pay rises will also have an effect on increasing payments made to the U.S. trustee. It is also important to remember that not everyone qualifies for Chapter 13, and in some instances those in financial difficulty would be better off filing for Chapter 7 bankruptcy.

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