What’s a Chapter 13 Bankruptcy?

Chapter 13 is a type of bankruptcy.  It’s an option for individuals who can’t qualify for Chapter 7, and have property and assets they want to keep.  In order to qualify you have to have enough income to pay expenses and pay off debtors.  This person has regular income and can pay living expenses but can’t pay their debts regularly.  Debt is restructured and some creditors will be paid back in full with interest, some in full and others will be repaid a percentage of the debt.

The U.S Bankruptcy code defines the eligibility to file for Chapter 13. It is based on inflation and the latest change took place in 2010.  To be eligible to file, your unsecured debts cannot be higher than $360,475, and your secured debts cannot be higher than $1,081,400.

Debts not forgiven in chapter 13:

• Those you forgot to list, unless the creditor learns of the bankruptcy case
• Child support and/or alimony
• Personal injury or death caused by your intoxicated driving or under influence of drugs
• Government sponsored student loans
• Fines and penalties from violating the law such as traffic tickets and criminal restitution
• Recent income tax debts and other tax debts
• Debts incurred on the basis of fraud such as lying on a credit application
• Credit purchases of $500 or more for luxury goods or services made within 90 days of filing
• Loans or cash advances of $750 or more taken within 70 days of filing

Advantages

• Can keep both exempt and non-exempt properties
• Avoid wage garnishment
• Co-signers will be protected
• Home foreclosure can be delayed
• Interest rates on certain loans can be reduced
• Payment terms on most debts can be extended
• Chapter 13 can be filed immediately after Chapter 7 discharge to pay off any remaining liens
• Debts not discharged by Chapter 7 can be reduced under Chapter 13

Disadvantages

• Can’t obtain new credit or credit increases while under the plan
• Pay high legal fees – costs for trustee, attorney and court
• Report to a trustee about income and finances
• Destroy your credit for years
• Make it difficult to get insurance
• May impact future employment and promotions
• Remains on credit report for 7 years

As with Chapter 7 bankruptcy, your credit is ruined for up to 10 years and it is difficult to obtain new credit.  Your credit was probably bad already, but the bankruptcy makes it even worse.  You will not only have problems re-establishing credit and have to pay the highest interest rates, but also making major purchases.   Chapter 13 doesn’t permit you to get additional credit until these obligations have been paid, which can be five years.  Please consider other alternatives other than filing for Chapter 13, such as working with your creditors to work out a payment plan or even settle for partial payment.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Bankruptcy, Credit Cards, Credit Report, Debt, Financial, Money & Identity

This post was written by John Ulzheimer