Chapter 13 Bankruptcy - Pros and Cons
Filing for Bankruptcy Can Help You Become Debt-Free
May 1, 2009
Chapter 13 bankruptcy gives American's the chance to become debt-free over the course of the next three to five years. Filing for bankruptcy under chapter 13 gives a person experiencing financial difficulties the opportunity to write-off debt whilst protecting their non-exempt assets. Unlike chapter 7 bankruptcy, there is no means test but personal credit scores will still be negatively affected.
Advantages of Chapter 13 Bankruptcy
- Debt-free. Chapter 13 bankruptcy gives a US citizen the opportunity to become debt-free once the pre-agreed number of monthly repayments have been made. The remaining debt is written-off.
- Prevents foreclosure. Provided that the payments are made each month, a debtor is able to avoid foreclosure or a short sale.
- Non-exempt assets. Whilst a debtor would lose non-exempt assets under chapter 7 bankruptcy, filing for bankruptcy under chapter 13 provides the insolvent with protection.
- Further legal action. Filing for bankruptcy prevents any further legal action being initiated by other creditors that haven't yet done so.
- Flexibility. Provided creditors agree, the terms can be made more flexible regarding repayments.
Disadvantages of Chapter 13 Bankruptcy
- Monthly repayments. An insolvent is expected to make contributions each month from any disposable income in order to maintain possession of any non-exempt assets.
- Credit score. Filing for bankruptcy will negatively affect a personal credit score for a period of between 7 and 10 years. It will begin to improve once a couple of years have elapsed. Also, chapter 13 bankruptcy isn't quite as bad as chapter 7 bankruptcy as repayments are being made.
- Access to credit. A low credit score makes it difficult to gain access to credit, although there are a number of lenders that specialise in adverse credit customers.
- 6 year rule. Those filing for bankruptcy under chapter 13 cannot file under chapter 7 more than once in any 6 year period. This rule may be waived for those that have repaid over 70 per cent of unsecured debts.
- Taxes, child support and alimony. Chapter 13 bankruptcy does not discharge a debtor of their obligation to pay any taxes, child support or alimony.
- Certain loans. Car and student loans can't be discharged by filing for bankruptcy, although protection will be afforded from further creditor harassment.
- Mortgage lien. There may still be an obligation for debtors to repay any mortgage lien on a home.
Chapter 13 bankruptcy allows someone experiencing serious financial difficulties to reorganise debts and become debt-free after a period of three to five years. Whilst it doesn't involve making monthly contributions and will negatively affect credit scores, it does allow the insolvent to keep non-exempt assets that wouldn't be possible under chapter 7 bankruptcy.
Sources
American Bankruptcy Institute
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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