Often referred to as the “Wage Earner’s Bankruptcy,” a Chapter 13 filing protects your assets while giving you an opportunity to make your creditors as whole as possible over a three- to five-year period. You can also catch up on missed mortgage payments and car payments to stave off a foreclosure or repossession. Simply put, filing for bankruptcy protection under Chapter 13 gets creditors off of your back, while you work to get your finances back on track.
Still, though, it’s worth asking: When is filing Chapter 13 worth doing?
The Alternative
Most consumer bankruptcies fall under Chapter 7 or Chapter 13.
All qualifying debt is wiped out with a Chapter 7 filing; It’s like pressing a reset button on your finances. However, unlike Chapter 13, you could lose your home, your car and other assets.
Qualifying for a Chapter 7 filing typically means your income during the six months prior to the filing date is less than the median income in your state for a family of your size. Additionally, your disposable income (what you have left after meeting certain obligations) falls below the level set by law in your state.
In most cases, if both of those are true you can’t really afford to file Chapter 13.
The Automatic Stay
As some reviews go to show, life can be tough when creditors are hounding you day in and day out for payment of outstanding debt — and you’re not sure how you’ll come up with the funds.
The automatic stay granted under Chapter 13 keeps them at bay.
Other than child support and alimony, all collection efforts against you are put on hold. This means you don’t have to worry about wage garnishment, bank account levies, mortgage foreclosure, car repossession or civil judgments mandating monetary compensation.
Now, with that said, you must continue making payments on your secured loans, lest those creditors request the stay be lifted so foreclosure or repossession can proceed.
Protecting Non-Exempt Property
Perhaps the most significant aspect of a Chapter 13 filing over a Chapter 7 is the protections the former provides for certain types of property you want to keep. After all, most of your possessions are placed in the hands of a bankruptcy trustee under Chapter 7.
This person can liquidate them in order to pay your creditors as much as possible. Under a Chapter 13 filing you have the option of paying for the things you’d like to keep.
In most instances. Items such as modest equity in a car, furniture, clothing, tools you need to conduct your business, and retirement accounts are exempt. Other items may qualify as well; it all depends upon the law in your state.
The Upsides of Chapter 13
You can keep most of your possessions, as long as you have the ability to make payments.
You can extend debt payments to make them easier to handle and, as we mentioned above, you can catch up on missed mortgage and car payments. You’ll also have the option of giving items up during the repayment period if holding on to them is creating too much of a burden.
The Downsides of Chapter 13
Debts must be paid out of your disposable income, which means there will be no such thing as extra cash while you’re in the repayment period.
Your credit rating will be ruined for up to ten years following the filing and you’ll lose all of your credit cards. Getting a new mortgage will be difficult if not impossible and you won’t be able to switch to Chapter 7 if the plan is too hard to maintain.
Student loan debt, alimony, and child support won’t go away and you’ll be required to stand up in open court and tell everyone how things went sideways on you.
So, When Is Filing Chapter 13 Worth Doing?
As with so many other things in life, the answer is — it depends. If you have a steady income stream and assets you want to keep, a Chapter 13 bankruptcy filing might well be your best shot at starting over again without losing everything.
