The Pros and Cons of Chapter 13 Bankruptcy Protection

If you’ve been investigating bankruptcy protection as a potential solution for your financial woes, you’ve probably run across numerous mentions of “Chapter 7” and “Chapter 11.” A third option called Chapter 13 bankruptcy also exists. Nearly 300,000 Americans filed for Chapter 13 bankruptcy in 2016. Contact a bankruptcy attorney to find out if Chapter 13 is a good option for you.

What Is Chapter 13 Bankruptcy Protection?

Chapter 13 bankruptcy protection is essentially designed to help individuals with jobs and disposable income who are experiencing struggles with their cash flow. It offers these individuals the opportunity through a court-approved repayment Plan to consolidate their debt and to pay it off over 3 to 5 years. As long as the Chapter 13  Plan meets statutory requirements and has been approved by the Bankruptcy Court, the creditors to whom monies are owed do not have to approve of the repayment plan. Chapter 13 allows you to remediate three distinct categories of debt:

• Secured claims: If you offer a creditor collateral in exchange for a loan and you fall behind on repayment, then that creditor has the right to seize the collateral that you provided for the loan. This type of claim is referred to as a secured claim. Two of the most common types of secured debts are car loans and mortgages.
• Unsecured claims: Loans that are made without collateral are referred to as unsecured claims. Unsecured debts can be classified as either priority claims or non-priority claims.
• Priority claims: Priority debts are unsecured debts such as child support, alimony and certain tax obligations. If you file for Chapter 7 bankruptcy, these are the types of debts that will be paid first if there is money available to pay creditors. If these debts not paid in full from the proceeds of your Chapter 7 asset liquidation, you’re still responsible for paying the remainder.

The Bankruptcy Court must be convinced that you have a sufficient amount of disposable income to make adhering to a repayment plan feasible before it will approve your Plan. Disposable income is the amount you have left after the costs of necessities like housing, food and medical care have been subtracted from the amount you earn. Shortly after your bankruptcy lawyer files the petition for Chapter 13 relief, you must submit your repayment plan. An administrative hearing with the Trustee called the First Meeting of Creditors will be held to determine whether your plan is realistic and fair and whether it adheres to the requirements of the United States Bankruptcy Code. If your plan is approved by the Court, you will be given a three- or five-year term in which to pay off your debts. The Chapter 13 Trustee will receive and disburse payments to creditors under your approved Plan, and otherwise supervise your compliance with bankruptcy law and rules.

The Benefits of Chapter 13 Bankruptcy Protection

Arguably, one of Chapter 13’s greatest advantages is that it may be able to help stop foreclosure proceedings. If your mortgage is in arrears, you’ll still be required to pay the full amount that you owe; however, you’ll be able to space those payments out over either three or five years. This is the primary reason why many individuals choose Chapter 13 over Chapter 7. Note that while you’re making up those back payments, you’ll also have to keep up to date with any currently due mortgage payments.

The Disadvantages of Chapter 13 Bankruptcy Protection

It can take as long as five years to complete a Chapter 13 repayment plan. During this time, your disposable income will be dedicated to repaying your debt, which essentially means you will not be able to buy anything using credit. During that time, any new assets you acquire (eg lottery winnings, or large bonuses) may have to be put into the plan. After the payment plan is successfully completed, you get a discharge, the Chapter 13 bankruptcy will remain on your credit report for an additional 10 years, and for at least some time less than that it might be very difficult to apply for new credit.

Contact Us Today

Is declaring Chapter 13 bankruptcy the right move for you? At Neuner & Ventura, our bankruptcy attorneys work hard to provide you with the information that can help you make a decision that’s right for you and your family. Call our law office in Marlton, New Jersey, today at (856) 596-2828 to set up a consultation.