Pros & Cons of Filing Chapter 13 Bankruptcy

While many people consider filing for bankruptcy protection one step short of a death sentence, there is life after declaring bankruptcy. New credit opportunities will eventually be available as well.

Pros & Cons of Filing Chapter 13 Bankruptcy
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The most commonly employed consumer bankruptcy protection comes in one of two flavors, Chapter 7 or Chapter 13. The former requires the liquidation of certain assets to dispense with most forms of debt altogether. The latter establishes a repayment plan during which you make good over a three- to five-year period. Thus, those who have assets to protect should consider the pros and cons of filing Chapter 13 bankruptcy before making the decision. Here’s what you need to know.

Chapter 13 Pros

You Can Keep Your Assets

The whole point of Chapter 13 is to enable you to work out a way to pay off your creditors without sacrificing the life you’ve worked to create. With that said, the value of certain “non-exempt” items you’ll keep also serves to establish the minimum amount you must pay. While the rules vary from state to state, exempt items usually include your home, your car, personal items, household goods, furniture, and jewelry.

Flexible Payment Plans

Payment plans aren’t written in stone. Instead their nature depends upon the benevolence of the Trustee assigned to your case. You can sometimes stretch out your debt payments, reduce the amount you pay each month, and even choose to give up some items after the decision has been handed down.

What’s more, you aren’t required to pay debts in full. The value of your non-exempt assets will determine the amount you’ll repay when filing bankruptcy under Chapter 13. Further, creditors can’t come after you for anything else to do with that debt once you’ve met the requirements of the judgment.

Relief Is Practically Unlimited

Unsecured debts such as credit cards, medical bills, and personal loans can be wiped away completely — as long as you apply your disposable income to the debts. Additionally, you won’t need to pay them in full to settle the accounts.

You Can Still Get Loans

Certain lenders specialize in working with people who have filed for bankruptcy protection. Yes, their interest rates tend to be higher and you might have to come up with rather significant down payments as well, but you can still get credit if you really need it for something.

Chapter 13 Cons

You’ll Surrender Your Credit Cards

Given you’re probably defaulting on them anyway, that might not be such a big deal. However, you’ll have to wait at least a year or as much as three to get another one. And, when you do, the interest rate and fees will be substantial.

Some Types of Debt Won’t go Away

Alimony, child support and federal student loans will survive the proceedings.

You’ll Forego the Chapter 7 Option

Under Chapter 7, you’ll liquidate non-exempt items and the proceeds will be used to satisfy your debts. If you’re awarded a Chapter 13 judgment, you’re barred from the Chapter 7 option for six years.

You’ll Sacrifice Your Disposable Income

Remember, your repayment plan is predicated upon the income you have left after your basic needs (food, shelter, medical expenses, car payment, and the like) are met. Any cash over and above what it takes to cover those costs will be funneled into the plan. In other words, when it comes to extra cash? Yeah, you won’t have any.

On the other hand, you will at least pay your creditors something. A lot of people feel better about having done that. What’s more, a Chapter 13 filing will drop off of your credit report after seven years (if it’s completed successfully). 

Chapter 7 stays for 10. These are just a few of the pros and cons of filing Chapter 13 bankruptcy. There’s still quite a bit more you should know, so consult an attorney before making any decisions in this regard.