Chapter 13 Bankruptcy Explained

A variety of adverse events can happen over one’s lifetime. Many can cause financial hardships such as a job loss, death in the family, medical issues, business failures or financial mismanagement. When debts become overwhelming, many people who are in over their heads, have nowhere to turn but bankruptcy.  

Bankruptcy laws are designed to protect consumers who are in over their heads. Bankruptcy has been around since the beginning of time and is even documented in the bible. There are two types of bankruptcies for consumers, Chapter 7 and Chapter 13. Filing a Chapter 13 is far more complicated.There are debt limits and filers must have a steady income to support repayment of debt.

A chapter 13 bankruptcy (also referred to as a wage earner’s plan) is a court ruled plan allowing debtors to make payments to repay their debts, unlike a Chapter 7 where they are eliminated all together. Chapter 13 allows debtors to reorganize their debts over a period of time (typically 3-5 years). This allows debtors to  catch up on mortgage and car loan payments that are past due. Debtors may also include unsecured loans such as credit cards or payday loans.

Some debt types included in a Chapter 13 are given partial forgiveness, while others are required to be paid back in full. Payback amounts are dependent on debt type as well as debtors ability to be paid back over the given period of time.

Chapter 13 Bankruptcy Filing Limits

There are debt limits when filing for a Chapter 13 bankruptcy unlike a Chapter 7. Secured debt limits can not exceed $1,184,200, while unsecured debt may not exceed $394,725. These are current debt limits are periodically adjusted for inflation.

Can a Chapter 13 Bankruptcy Help Stop Foreclosure?

A Chapter 13 bankruptcy can be used to stop the foreclosure process and are frequently used in emergency foreclosure situations. Chapter 13 allows homeowners the ability to pay off a mortgage arrearage over the scheduled repayment plan. Upon filing a Chapter 13 bankruptcy petition, the courts may approve an “automatic stay” stopping the foreclosure process until a repayment plan is approved by the court. Repayment plans must meet certain criteria and may also be rejected.

Chapter 13 bankruptcy may be a good tool for those who are behind on their financial obligations and just need time to get caught back up. Borrowers may also be eliminate second or third lien position mortgages in a Chapter 13. If you would like to find out if a Chapter 13 is right for you or not, or would just like to discuss your situation further, please call our office for a no cost or obligation consultation at 847-398-4793,

Drawbacks of a Chapter 13 Bankruptcy

While there are unique advantages to filing a Chapter 13 bankruptcy, there are also some disadvantages.  One of the biggest disadvantages of filing a Chapter 13 bankruptcy is that debtors remain in bankruptcy for 5 years in which they may be unable to acquire any new financing. This means no new credit cards or car loans throughout that period.  Those seeking many government positions, financial adviser or other positions that requires financial competence may have a hard time getting a new job because a poor credit rating.

Many people have missed their payments in a Chapter 13 bankruptcy and wind up filing a Chapter 7 anyways.  This prolongs the agony of a bankruptcy and can lead to longer recovery times. Lastly even after successful completion of a Chapter 13, their bankruptcy will still show up on debtors credit reports for 7 years after. This can make it harder to borrow money resulting in higher interest rate loans and restrictions from creditors.

Advantages of Filing Chapter 13 Bankruptcy

One of the main advantages of filing a Chapter 13 bankruptcy is that it enables those whose home is in immediate jeopardy of court ordered foreclosure sale.This can give those filing for bankruptcy immediate relief while they get their finances in order. Chapter 13 is a tool to help those who have fallen behind on their debts and still want to pay creditors all the money they borrowed back and get back on track. Debtors with significant equity in their home may be able to refinance their home and use a portion of their equity to pay off their debts and eliminate their bankruptcy all together.

Should You File Chapter 13?

When deciding whether to file Chapter 13 Bankruptcy, it is important to discuss your financial situation with a professional.  There may be many alternatives to avoiding bankruptcy that may help you get back on your feet much faster. If you have questions about whether a Chapter 13 is right for you or not, contact us for a no cost or obligation consultation.

We will lead you in making an appropriate decision based on your financial situation. Because everyone’s financial situation is different, there is no one right or wrong answer.  So call us now at 847-398-4793 to schedule your free consultation.