Chapter 13 bankruptcy, also called a “wage-earners” bankruptcy, is essentially a repayment plan based on what you can afford. It allows you to prioritize your debt and make payments based on your income. This plan is best for those who are experiencing a temporary setback and need some time and space to breathe, in order to get their financial situation under control.
In a Chapter 13 you will create and propose a repayment plan that will span three to five years with monthly installments based on your ability to pay. You are able to keep your possessions. Additionally, creditor harassment and collection actions must end.
How Chapter 13 Compares to Other Debt Solutions
Chapter 13 bankruptcy is a viable first choice for dealing with debt. Here is how a Chapter 13 bankruptcy compares to the other debt consolidation solutions we have previously discussed in our Debt Consolidation Solutions blog series:
#1 – Costs Less than Debt Consolidation
When you file for Chapter 13 you can expect to pay court fees and attorney fees. The court fees are a one-time fee and your attorney fees will be rolled into your monthly payment and treated just like a payment to a creditor.
There are a few fees associated with filing for bankruptcy. Those fees include a $281 case filing fee, $25 required credit counseling course fee and $15 personal finance management class fee. The court understands you are resorting to bankruptcy due to a difficult financial situation so there can be flexibility with the case filing fee payment, with permission from the court.
The total bankruptcy court and attorney fees plus total debt payments made within the repayment period will be less than any debt consolidation program total costs.
#2 – Gets Completed Faster & Timeline is Set
Thirty days after you file Chapter 13 you must start making payments according to your proposed plan. If your plan is approved by the court, your repayment period (three to five years) starts when you start making payments. This means your total bankruptcy timeline will be a maximum of three years and one month or five years and one month.
There are no timeline extensions to ensure you make fair and adequate payments to your creditors, as in a debt management program. Additionally, there are no timeline uncertainties, as found in a debt settlement program, to give you time to come up with money. Your monthly payments are set based on what you can afford (#3) and any unpaid debt is eliminated (#7) at the end of your repayment period.
#3 – Monthly Payments are Set Based on What You Can Afford
To reiterate what was stated earlier, your financial situation drives your monthly payment amount. Your monthly income minus your necessary monthly expenses will be your monthly payment. Together with your bankruptcy attorney you will calculate this amount and then plug it into your repayment plan. This amount will be dispersed according to creditor priority.
#4 – Credit Score Takes a One-Time, Temporary Drop
Your credit score will drop due to your poor payment history. As you work through your bankruptcy and repayment period your credit score will remain low, temporarily. As soon as your repayment period ends you can immediately begin to rebuild your credit. Most people who file bankruptcy experience AN INCREASE in their credit score WITHIN ONE YEAR.
#5 – Requires Creditor Compliance
Your creditors do not have a choice when it comes to cooperating with bankruptcy. The court orders compliance and you are protected from that point forward. Additionally, all collection activities such as foreclosure, garnishments and harassment must end. Chapter 13 bankruptcy provides legal protection against your creditors, unlike any debt consolidation program that can only prevent harassment and request compliance.
#6 – Reputable Help
Unlike debt consolidation companies, there doesn’t have to be any concern or hesitation when hiring help for debt relief when you turn to a bankruptcy attorney. All bankruptcy attorneys are regulated by the State Bar. You can be assured a bankruptcy attorney will act in your best interests. A bankruptcy attorney will keep you involved every step of the way so you retain most decision making authority when it comes to your finances and your future.
#7 – Unpaid Debt is Erased Forever
At the end of your repayment period, if any debt remains, it is eliminated*. If your monthly payments don’t fully pay off all your creditors, you don’t have to continue to make payments to them. When you’ve successfully completed your repayment period your liability for any previous debts disappears.
*Non-dischargeable debts include child support, student loans, criminal fines and other specific exclusions outlined in the bankruptcy code.
#8 – Protected in the Future
The court protects you from creditor collection in the future. Filing bankruptcy is a legal procedure and therefore your creditors are legally bound to the outcome of your case. A court order will be issued to your creditors preventing them from collecting on your debt after your repayment period ends.
#9 – Credit Counseling
When you file Chapter 13 bankruptcy you are required to complete a credit counseling course before your repayment plan will be approved. This course will teach you how to properly manage your finances, avoid debt in the future and provide tips for building up your savings so you are prepared for emergencies. This is an educational opportunity aimed to prepare you for life after bankruptcy and responsible finance management.
Chapter 13 bankruptcy may be your best debt consolidation solution; talk to a bankruptcy attorney to find out more and how it will help you out of your current financial situation.