Benefits of Chapter 13

Not all debtors qualify for Chapter 13 bankruptcies. You must have a debt limit below a certain amount, along with an income high enough to make your installment payments and provide for your living expenses. If you don’t meet these requirements, you must file a Chapter 7 bankruptcy instead.

Benefits of Chapter 13 Bankruptcies

Once you file a Chapter 13, the court enters an automatic stay of all debt collections. Once you file the bankruptcy petition with the list of creditors, the clerk sends notice to each one. By law, they must stop all collection efforts. These include legal actions, wage garnishment, and harassing phone calls.

Some debts are not covered in a Chapter 13. Student loans are not dischargeable in any type of bankruptcy. The automatic stay does not prevent collection of certain debts such as landlord-tenant debts or child support arrears. While not a perfect financial cure-all, there are still many benefits to a Chapter 13.

Debt Consolidation

A big advantage of Chapter 13 bankruptcy is that it consolidates all your outstanding debts into a single payment plan. Rather than trying to pay off dozens of bills and creditors individually, your Chapter 13 plan lets you make one payment to the bankruptcy trustee, who disburses your payment to your creditors. This reorganization keeps your creditors satisfied and helps you get back on your feet.

The trustee works with you to determine your monthly payment based on your income, total monthly expenses, and the IRS requirements. The Chapter 13 bankruptcy process helps pay down your debts by centralizing the payments and renegotiating interest terms.

Pay Child Support Arrearage

Although you can’t discharge your child support or alimony arrears, you can include the arrearage in your payment plan. Child support is a priority debt and is paid ahead of some secured debts and all unsecured debts. Your payment plan will make the arrears part of your monthly payments so you can catch up with your support obligations while still making your regular child support payments.

Pay Delinquent Taxes

If you have back taxes, you know that the penalties and interest can accumulate quickly. When you file a Chapter 13, penalties and interest are part of the automatic stay. This keeps the amount due from increasing so you can pay down your tax burden in the three to five year period.

Pay Delinquent Home Notes

Depending on how the bank structures your mortgage, home loan, or home refinance, you may be able to modify your note and consolidate your payments into a single monthly payment. Some options may include:

• Stopping or delaying foreclosure while you repay your mortgage arrears
• Discharging a second mortgage through timely monthly payments on the first mortgage
• Creating a loan modification that gives you more manageable monthly mortgage payments

Mobile homes without land notes may also be part of your repayment plan if you are current on the payments. You can discuss these matters with your bankruptcy lawyer and trustee during your case conferences.

Avoid Foreclosure

After medical bills, most people file bankruptcy to slow or halt foreclosure proceedings. In a Chapter 13, filing the petition puts an automatic stay on the foreclosure while the debtor and trustee work out the payment plan. You may be able to stop the proceedings completely and cure the default if you can make up all the delinquent payments during the repayment period.

You must make all mortgage payments during the payment period. Even one missed payment during the payment plan will restart the foreclosure process. If you do not complete your payments during the time allotted, the bank can resume the foreclosure process after the payment plan discharge.

Prevent Car Repossession

Chapter 7 means tests review a debtor’s income and assets to see what property they can keep during a bankruptcy case. Debtors may be able to keep one car, but seldom two.

In a Chapter 13, you can keep your car even if you’ve fallen behind in your car payments. If the bank has repossessed the car, you can recover it unless the bank already held an auction. You can cure your default in your payment plan, and negotiate for a lower interest rate. Creditors may work with your trustee to lower your rates after you’ve made several regular payments on your plan.

Protect Co-Signers and Third Parties

The automatic stay extends to any co-signers and third parties. The “co-debtor stay”means that creditors cannot shift their collection efforts to anyone who shares liability with the original debtor. A Chapter 7 bankruptcy does not provide the same protection.

The protection only covers consumer debts. These are debts acquired for personal reasons, not for business or commercial purposes. For example, the stay protects a co-signer on the debtor’s personal car loan. It will not prevent collection on a car loan for a delivery van.

In some cases, a creditor may petition the bankruptcy court to lift the stay for certain co-debtors. After the bankruptcy discharge, creditors may collect any co-signed debts.

Rebuild Your Credit Score

A major advantage to the Chapter 13 is how quickly it comes off your credit report. Credit agencies remove a Chapter 13 bankruptcy from your credit report after seven years. A Chapter 7 affects your score for 10 years. Although the purpose of any bankruptcy filing is clearing your debts and giving you a fresh start, the sooner you can begin rebuilding your credit, the better.

Get Legal Advice From an Experienced Bankruptcy Attorney

Before you file Chapter 13 or Chapter 7 bankruptcy, you should discuss your options with a financial expert or a bankruptcy attorney. Bankruptcy laws vary by state, so you need to review your state laws to understand how a bankruptcy will affect you.