Chapter 13 Bankruptcy

When you are making the decision on whether or not to file for bankruptcy, there are always a lot of questions. This is a decision that will affect your future credit and, at times, your reputation. There are many types if bankruptcy that you can file for different circumstances, so you need to make sure that which type you file is the right one for your situation.

If you want to file for Chapter 13 bankruptcy, you should become familiar with some details. Chapter 13 Bankruptcy (also called a wage-earners plan) will allow a person with regular income to create a plan to repay all or part of his or her debts over time. Under Chapter 13 bankruptcy, a debtor proposes a repayment plan to make installments to creditors over a period of 3 to 5 years.

Chapter 13 Eligibility

Before you file, you need to know whether or not your actual situation makes you eligible for Chapter 13. In California, “Any individual, even if they are self-employed or operating an unincorporated business, is eligible for chapter 13 relief so long as the individual’s unsecured debts are less than $395,725 and secured debts are less than $1,184,200.” These amounts are adjusted periodically to reflect changes in the consumer price index. In addition, a corporation or partnership may not be a chapter 13 debtor.

The Bad Outcomes or “Cons” of Chapter 13 Bankruptcy

Filing for Chapter 13 Bankruptcy can take up to five years for you to repay your debts.

Your debts must be paid out of your 'disposable' income. This means that the income you have left after spending on necessities like food, shelter, or medical care is used to pay off your debt. All of your extra cash will be tied up during the entirety of your repayment plan.

Filing a Chapter 13 bankruptcy will remain on your credit report for up to a total of 10 years.

You will lose all of your credit cards, meaning you will be very limited on your extra money, since it is all already tied up in the repayment plan.

Having a Chapter 13 Bankruptcy on your credit report will make it more difficult to get a mortgage if you do not already have one.

You will not be able to file for a Chapter 7 Bankruptcy if you went through any bankruptcy proceedings under Chapter 13 within the last 6 years.

Declaring Chapter 13 bankruptcy now will make it harder for you to declare Chapter 7 later if you need to.

You will not be able to file for Chapter 13 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days, for reasons such as violating a court order or requesting dismissal after a creditor asked for relief from the automatic stay.

Filing Chapter 13 bankruptcy will not get rid of your obligations to pay any alimony or child support.

Filing Chapter 13 bankruptcy will also not get rid of your student loan debt.

Even if you have filed Chapter 13 bankruptcy, you may still be obligated to pay some of your debts, like a mortgage lien, even after your bankruptcy proceedings are completed.

The Good Outcomes or “Pros” of Chapter 13 Bankruptcy

While it usually takes longer for you to pay off your debts than many other forms of bankruptcy, Chapter 13 will allow you more time to make your payments, and trustees may be more flexible on the terms of your payments. You may also be able to stretch out your debt payments or reduce the amounts of your payments. You can sometimes even give up a piece of your property that you are making payments on to relieve some of the debt. Once you have successfully completed your repayment plan under Chapter 13, an individual creditor cannot obligate you to pay them in full.

While you are making your payments under Chapter 13 bankruptcy, you get to keep the property on which you are making payments.

Even though a Chapter 13 bankruptcy will stay on your credit record for years, it may be easier to explain the process to a future lender. A Chapter 13 bankruptcy is less harmful and easier to explain than missed debt payments, repossessions, or lawsuits, as it shows that you were trying your best to pay off your debts.

You lose access to your credit cards, but depending on your situation, those credit cards may be part of what got you into this mess in the first place. You might be able to obtain new lines of credit within one to three years of filing your bankruptcy, but with a much higher interest rate. It’s always important to be extremely careful with your credit card payments!

There are lenders out there who specialize in lending to 'high risk' people. That can be seen as an unfair characterization to make on someone who has taken a big step in solving his or her financial problems. Nevertheless, there is still an option for you, should you need to find a lender for something.

Even if you have gone through bankruptcy before, either with Chapter 13 or 7, if you obtained a Chapter 13 discharge in good faith by paying at least 70 percent of your unsecured debts, the six-year bar to file again does not apply.

If you do declare Chapter 13 bankruptcy now, you can get started sooner on rebuilding your credit. You can also always get a Chapter 13 plan if there is another disaster before you are entitled to file for Chapter 7. Basically, you can file Chapter 13 bankruptcy repeatedly, just remember that each filing will show up on your credit record and report.

To avoid harsh limitations against you for re-filing for bankruptcy, it is best to observe all court orders and rules as well as not ask to have your case dismissed if a creditor asks for relief from the stay. Remember, you are only prevented from re-filing for 6 months.

No matter your financial situation, it is always a good idea to at least consult with an attorney who specializes in these types of issues and see what your options are before you make a decision to file for any type of bankruptcy. If you have more questions about bankruptcy in the state of California, check out Dan Higson’s Chapter 13 bankruptcy page, or contact the Law Firm of Hathaway, Perrett, Webster, Powers, Chrisman & Gutierrez today! If you want more information on Chapter 7 bankruptcy, check out Dan Higson’s blog here.