Chapter 13 Bankruptcy
What is Chapter 13 Bankruptcy?
Many people like to refer to Chapter 13 bankruptcy as the “catch your breath” provision of the Bankruptcy Code. It is designed for people who have money to pay back their creditors but who can’t do it all tomorrow like the creditors are demanding. Chapter 13 bankruptcy allows you stop the harassing phone calls and lawsuits. Bankruptcy Chapter 13 gives you time to catch your breath while you pay your creditors. Chapter 13 bankruptcy stops garnishments, foreclosures, as well as repossessions of your car. You do not need the permission of your creditors to obtain Chapter 13 bankruptcy protection.
How Chapter 13 Works
The first step is to make a list of all of your debts. When you come to my office, I am going to review your income and create a budget for you. Then, we can propose a monthly payment that you can afford. You pay this new amount to the trustee each month and it covers all of your consumer debt. This one amount covers all credit card debt, medical bills, finance companies, and car loan. Sometimes, we can even include IRS tax debt in this total. Chapter 13 allows you to catch up on back mortgage payments and stops the interest and penalties on back taxes. Your Chapter 13 bankruptcy plan bars credit card companies and all other unsecured creditors from collecting interest. If you owe $10,000 in credit card and have an interest rate of 25 percent, you can save $2,500 per year in just credit card interest alone. However, I will tell you if Chapter 13 bankruptcy is not a good option for you. I receive many referrals from my clients because they know I shoot straight with them. How much you pay each month depends on what you can afford, not what the creditors demand. Depending on your regular income and budget we may be able to wipe out all unsecured debt in your Chapter 13 bankruptcy plan.
Who is eligible for Chapter 13?
To be eligible for chapter 13 relief, you must meet several requirements:
- You must be an individual, not a group or a corporation.
- Your unsecured debts, which are those debts that aren’t backed by any collateral assets, must be less than $394,725.
- Your secured debts must be less than $1,184,200. These are debts on assets like your house on your car, which your creditor can seize in the event that you do not make your payments.
- You must have received credit counseling within the previous 180 days.
What are the advantages of chapter 13?
- Provides more time. A chapter 13 case usually begins when your creditors are breathing down your neck, demanding a full repayment of what you owe them. By developing a chapter 13 plan with your bankruptcy attorney, you give yourself as much as five years to catch up and pay your debts, which is much more realistic than having to make all the payments at once. This is especially useful for someone who has a solid income but simply can’t make all the payments at once.
- Avoid foreclosure. While chapter 7 bankruptcy is all about liquidating your assets, chapter 13 is designed to help you keep them. Whether it be your house or your car, chapter 13 gives you a good chance of keeping your secured assets.
- Reduce interest. When it comes to debt, the interest rates are often what overwhelms the debtors, and this is particularly true with unsecured debts like credit cards.
- Consolidate all your debts. Another significant benefit of filing chapter 13 bankruptcy is that you can consolidate your debt. By developing a plan with a bankruptcy attorney, you create a single monthly payment that you are responsible for.
What are the disadvantages of chapter 13?
- Still have to pay the debts. This is a necessary disadvantage, as this is what allows you to maintain your assets. Even though the timetable is extended to as long as five years and you may get out of some of the interest, you will still have to pay most of the money back.
- Marr your credit score. For the seven years following the completion of your chapter 13 plan, your financial record will be marred by your bankruptcy.
- Increase in income goes to creditors. Let’s say while you are completing your chapter 13 bankruptcy plan you get a raise or an inheritance. More than likely, that money will be distributed to your creditors.
What are the myths about Chapter 13?
- Have to pay back every single debt. This is not always true. Many of the debts that we get rid of in chapter 7 we can get rid of in chapter 13. For instance, we are often able to lose some interest payments through chapter 13. But there are other areas, such as child support and tax debt, that you will simply have to pay as part of your chapter 13 plan.
My Income means I’m not Eligible. Some people think that their income will prevent them from filing a successful chapter 13 bankruptcy claim. This myth comes from income tests, which are actually designed to push people with consistent incomes out of chapter 7 and into chapter 13.
Contact us for a Free Consultation
Some bankruptcy attorneys will advertise chapter 13 as bill consolidation. Personally, I don’t think this type of advertising is completely honest. Chapter 13 works like a bill consolidation but there is no loan. Chapter 13 protects you from the collection efforts of your creditors while you pay them back over the life of your plan.
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