What Is Chapter 13 Bankruptcy & How Does It Work?
Chapter 13 bankruptcy is a type of personal bankruptcy that helps people who have too much debt to pay off. This type of bankruptcy has a repayment plan that can last up to five years, and during this time the debtor makes monthly payments to a trustee, who then distributes it to creditors, in an amount and percentage determined by the plan filed with the court.
Chapter 13 is a good option for people who need to catch up on mortgage payments, taxes, or child support, or simply for people who have the ability to repay their debts. They can do this without paying interest, late fees, or penalties.
What Is A Means Test?
The means test is used differently, depending on which chapter you file. If you intend to file a Chapter 7, the means test is meant to determine whether you qualify for a Chapter 7. For a Chapter 13 bankruptcy, however, the means test is used to determine the length of your plan, and how much, if any, you must pay to your unsecured creditors.
It is calculated using your gross income in the 6 months prior to filing, but then considers other expenses and debts anticipated in the future.
If you are considering a Chapter 13 bankruptcy, you should consult with an experienced bankruptcy attorney. This will help ensure that your case is handled correctly and that the bankruptcy court has all the information it needs to make a fair decision.
What Are The Benefits If You File For Chapter 13 Bankruptcy?
There are many benefits to filing for Chapter 13 bankruptcy. Some of these benefits include the following:
- Debtors can catch up on their home mortgage in a Chapter 13 plan without interest or late fees, or stop foreclosure in a Chapter 13 plan.
- Chapter 13 protects individuals from the collection efforts of creditors.
- Chapter 13 permits individuals to keep their real estate and personal property, which allows them to catch up on past due payments and prevent repossession.
- Interest rates on some secured debts may be lowered in a Chapter 13 plan, which is helpful for car loan balances that are past due or for people who have been struggling to repay them because they’re also facing other financial issues.
- Filing for Chapter 13 eliminates interest and penalties on certain taxes.
- Filing for Chapter 13 is helpful in eliminating junior liens, including second mortgages (known as a “lien strip”).
- In some cases, you can reduce the amount you owe on a car loan or other secured debts with Chapter 13. In some circumstances, secured claims need to be fully paid only up to the value of your property securing the claim.
Filing for Chapter 13 is an option, but there are other options to consider before making the decision to file.
What Are The Drawbacks Of Filing For Chapter 13 Bankruptcy?
While Chapter 13 bankruptcy has many benefits, there are also some drawbacks to consider before filing.
First, you will be required to make monthly payments to your trustee for three to five years, depending on your income and debts.
Second, if you fail to make payments or miss a payment deadline, your case may be dismissed and you will lose the protection of the bankruptcy court.
Finally, filing for Chapter 13 bankruptcy can temporarily damage your credit score.
How Does Chapter 13 Bankruptcy Affect Your Credit Score?
When you file bankruptcy, it will have a negative impact on your credit score. This is because you are not able to repay your debts as agreed upon. How long this mark stays on your credit report depends on the chapter of bankruptcy that you filed. Chapter 13 stays on for seven years, while Chapter 7 remains for 10 years.
However, there is some good news! If you manage to complete the repayment plan under Chapter 13, it may help establish a track record of paying your bills on time – which could lead to a less severe hit to your credit score than if you filed for Chapter 7 bankruptcy. Bankruptcy can be a difficult process to go through emotionally and financially, but with time and effort, it is possible to rebuild your credit rating.
What Debts Can Be Discharged In Chapter 13 Bankruptcy?
There are a few types of unsecured debts that can be discharged in Chapter 13 bankruptcy. These include credit card debt, medical bills, and personal loans. In addition, some secured debt can be discharged, depending on the circumstance. And finally, in some cases, debt arising out of divorce settlements can be discharged in a Chapter 13, so long as it is not considered a domestic support obligation.
It’s important to note that you will need to continue making payments to the Trustee for a minimum of three years. Sometimes all unsecured debt is paid, sometimes none of it. Each bankruptcy petition is unique so the outcome depends much on the details of the case. If you miss payments or stop making them altogether, your case could be dismissed.
One thing to keep in mind is that secured loans–like car loans–may not be fully discharged in Chapter 13 bankruptcy. However, the balance on the loan may be reduced if the vehicle’s depreciated value is taken into account.
What Is The Difference Between Chapter 7 & Chapter 13 Bankruptcy?
There are six chapters of bankruptcy, but most individuals or families file either a Chapter 7 or a Chapter 13. Chapter 7 can offer relief by discharging some of your debts, but to do so you’ll have to pass the means test.
It’s important to do research before making any decisions about filing for bankruptcy. Bankruptcy is a big step, and it’s not right for everyone. Make sure you understand the consequences of each type of bankruptcy before moving forward.
What Are The Eligibility Requirements For Filing For Chapter 13 Bankruptcy?
In order to be eligible to file for Chapter 13 bankruptcy, you need to meet certain requirements. These include:
- Showing ability and willingness to repay debt in a reasonable amount of time.
- Having unsecured debts less than $465,275 and secured debts less than $1,395,875.
- Filing state and federal income tax during the four-year period before filing for Chapter 13
- Receiving credit counseling from an approved organization before filing
What Are Some Common Myths About Chapter 13 Bankruptcy?
There are many myths about Chapter 13 bankruptcy. The most common is that it will destroy your credit score. This is not true! In fact, filing for Chapter 13 may actually help to improve your credit score over time.
Finally, many people believe that they cannot qualify for Chapter 13 bankruptcy if they have a low income. However, this is not always the case–many people with low incomes can still qualify for Chapter 13 bankruptcy.
About Lincoln-Goldfinch Law
We’re a cohesive, compassionate team that believes in progressive, forward-looking legal solutions that uplift, enlighten and empower people to make quick, informed decisions about their legal options … legal representation with a personal touch, stress-free guidance through scary situations.
We encourage you to give us a call today, so we could get to know you and help you make the best decision, whether it is one built around bankruptcy or another debt elimination solution that will help you regain clarity, peace, and balance.
- Are you facing a mountain of debt?
- Is rising inflation giving you the blues?
- Are you concerned about the cost of money?
- Are you concerned about being able to afford groceries and gas from one week to the next?
If you’ve answered yes to these questions let’s talk about a new alternative. Schedule A No Obligation Free Bankruptcy Evaluation with us and let’s discuss how we can best help eliminate your specific financial struggles!