Chapter 13 bankruptcy is a bankruptcy program that lets the debtors who qualify for it keep most of their property, and pay off a part of their debts to the creditors according to a payment plan. Its main peculiarity is that it’s designed not only for regular individuals living severe financial problems but also for small proprietary business owners.
In what ways is Chapter 13 different from Chapter 7 bankruptcy?
The main advantage of Chapter 13 over Chapter 7 bankruptcy is that it lets the debtor keep some of his/her assets, which would definitely be liquidated by the bankruptcy court if the person chose to stick to Chapter 7. You will most probably be allowed to keep your home and car in both cases (if certain equity limitations do not apply to you) – but with Chapter 7 you won’t be allowed to keep on with your rental property, valuable collections (antiques, for instance), etc. Plus, under Chapter 13 you will have your debt repayment rates reduced – and it will take you less time to build up a good credit history again since Chapter 13 bankruptcy will not be kept on your record for as long as Chapter 7 will. Chapter 13 bankruptcy also gives you the chance to discharge those debts that might be considered non-dischargeable under other bankruptcy chapters (such as fraud judgments, etc).
Basically, Chapter 7 bankruptcy is aimed at giving you a permanent relief from all of your debts, so you don’t have to pay anything off after your bankruptcy discharge is announced. Thus, a person receiving a Chapter 7 bankruptcy relief gets a so-called “fresh start” in his/her financial affairs.
Chapter 13 bankruptcy is different – when you file for it you have to be ready to pay off most of your outstanding debts first, and only after that the bankruptcy court will give you the discharge.
Who can qualify for Chapter 13 bankruptcy relief?
If a debtor is planning to file for Chapter 13 bankruptcy, he/she should know that people with more than $250,000 of an unsecured debt and more than $750,000 of a secured debt will not be allowed to file. Another important criterion is that these debts should be fixed and not subject to any changes in the future.
How long does a Chapter 13 repayment usually last?
Basically, this depends on the sum of money you can afford to pay monthly (having paid all your basic living expenses, such as food, housing, insurance, mortgage, etc).
The average length of a Chapter 13 repayment plan is 3 years. However, a debtor who can’t afford this plan, is allowed to request some additional time to be added to this period (not more than extra 24 months). Thus, you just pay the amount that you can afford monthly (let’s say, it’s $200.00 – after you have paid all your normal living expenses) for the period of 36 months and then the bankruptcy judge discharges you from all your unsecured debts that can be discharged, no matter whether you have paid off the whole of the outstanding debt or not.
However, you shouldn’t forget that you will also have to pay off any of your current secured debts (mortgage, etc) according to the regular payment schedule while you are on the Chapter 13 repayment plan. You should note that Chapter 13 bankruptcy has nothing to do with your mortgage and all similar secured debts.
What are the disadvantages of filing for Chapter 13 bankruptcy?
The measures taken against late payers on Chapter 13 repayment plan are pretty harsh – if you fail to make any of the payments under your plan, the court will immediately dismiss your case.
How does Chapter 13 bankruptcy affect the debtor’s credit history?
The impact of Chapter 13 bankruptcy on the debtor’s credit report is pretty bad, though not as bad as that of the Chapter 7. The note of Chapter 13 bankruptcy is kept on the debtor’s credit record for 7 years beginning from the moment of filing (for comparison: the note of Chapter 7 bankruptcy stays on the record for as long as 10 years). For instance, if you choose to stick to the 3-year repayment plan, you will only have to wait for 4 years after you’re done with it and your credit score will get normal again. The Chapter 13 bankruptcy record implies certain limitations for the person having it on his/her credit history – for instance, he/she will not be able to borrow a large sum of money or get a really low interest rate on a credit, etc. However, getting a small credit – a secured credit card loan, for example, will not be of any problem. Still, people with a Chapter 7 record on their credit history will have much more trouble than you will, that’s for sure.