Is Chapter 13 Bankruptcy Worth It?

The two most common types of bankruptcy for individuals and families are: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Whether filing for a Chapter 7 or a Chapter 13 bankruptcy is right for you will depend on your individual set of circumstances. There are both advantages and disadvantages to Chapter 7 bankruptcy cases and Chapter 13 bankruptcy cases.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is often referred to as a “wage earner’s plan.” Filing a Chapter 13 bankruptcy allows you the opportunity to pay back your debts in full, or in part, over a period of 3 to 5 years using your disposable monthly income.

During the life of your Chapter 13 bankruptcy case, you will be required to make monthly installment payments to your trustee. Your trustee will then be responsible for distributing your monthly payment to all your creditors, giving priority to certain creditors over others, until you have completed your 3 to 5-year plan.

The length of your Chapter 13 case will depend on your monthly gross income. If your monthly income is less than the applicable state median for your household size, the plan will be for 3 years unless the court approves otherwise. If your current monthly gross income is greater than the applicable state median for your household size, the plan will generally last for 5 years.

Under no circumstance will your Chapter 13 payment plan extend beyond a 5-year period. During the time you are in a pending Chapter 13 case, you are protected by the automatic stay. The automatic stay protects you from any collection efforts by your creditors.

The biggest benefit to filing a Chapter 13 bankruptcy is the automatic stay protection you receive when you file. During the 3-5 years that you are in an active Chapter 13 case, your creditors are forbidden from trying to collect from you in any way unless the court gives them permission. They cannot send you letters, call you, file lawsuits against you, or make any attempts to collect from you.

What are the Advantages to Filing a Chapter 13 Bankruptcy?

While a Chapter 7 bankruptcy arguably gives you the biggest benefit in a no-asset case, the advantage to filing a Chapter 13 bankruptcy is the ability to keep your non-exempt assets. Chapter 13 bankruptcy is a great alternative to a Chapter 7 liquidation bankruptcy when you have non-exempt assets.

If you have property or assets that are in danger of being liquidated in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy will allow you to keep your property as long as you are complying with the terms of your Chapter 13 plan. The most common type of asset in danger of liquidation is the equity you have in a home.

For example, if you have equity that is over the limit of the exemption you are allowed to apply to protect that property, your home will most likely be liquidated if you file a Chapter 7 case. By applying the right exemptions, you’re able to protect some or all of your property.

If your state allows the use of federal exemptions, you may apply the federal “homestead” exemption which protects up to $25,150 in equity of your home. The amount of equity you have in your home is calculated by subtracting the amount you owe from the amount your home is worth. You will have equity if the amount you owe is less than the market value of your home.

Your home is in danger of being liquidated if the equity amount in your home is more than what you are allowed to protect by applying either a federal or state homestead exemption. In a Chapter 7, the non-exempt value of your home becomes part of the bankruptcy estate which allows the trustee to sell your home and distribute the proceeds to your creditors.

People will file a Chapter 13 bankruptcy as opposed to a Chapter 7 bankruptcy when they either don’t qualify to file a Chapter 7 bankruptcy, or if they have assets they want to protect. A Chapter 13 bankruptcy works like a consolidation of your debts.

Both secured and unsecured debts can be paid through your Chapter 13 plan simply by making one payment to your trustee each month for 3 to 5 years. Secured debts are debts attached to any type of collateral, for example, a mortgage payment or a car payment.

Because you can make payments to both secured and unsecured creditors during your plan, a Chapter 13 case will allow you to catch up on secured payments you are behind on as long as you keep up with payments going forward. By complying with the terms, you will be able to save your home from foreclosure and your vehicle from repossession or impoundment.

Another major advantage to filing a Chapter 13 is the potential that you will only be required to pay a percentage or your unsecured debt. Unsecured debts include credit card debt, medical bills, and payday loans. Once you have completed your Chapter 13 plan, the percentage you still have left to pay is discharged.

If your Chapter 13 plan requires that you pay your unsecured creditors at 10%, for example, the 90% you still would otherwise owe, will get discharged once your Chapter 13 case is complete. Because you will potentially only be making one payment to your trustee each month, you will not have any contact with your creditors during your Chapter 13 case. No calls, mail, or collection efforts.

Conclusion

Whether filing a Chapter 13 is worth it, and whether it makes the most sense in your situation, will depend on the assets you have and how much income you receive. If you do not qualify to file a Chapter 7 case, or if you have non-exempt assets you want to protect, a Chapter 13 could be the best solution for you.