Chapter 13 bankruptcy is a type of bankruptcy that allows you to repair your credit by repaying some of your debt. Chapter 13 bankruptcy is best for those with a high income or with many assets that can be liquidated. If you are trying to decide whether or not to file chapter 13 bankruptcy, here are some of the advantages and disadvantages for you to consider.
If you are falling behind on your mortgage payments, you can avoid foreclosure by filing bankruptcy. Once your bankruptcy is filed, lenders can't collect debt or start a foreclosure process until the courts permit them to do so. Filing bankruptcy will give you time to catch up on mortgage payments before a foreclosure process can begin.
When you file Chapter 13, you only have to make one debt payment. Instead of digging through your bills trying to decide which creditors to pay off first, all of your debts are consolidated. You will make one affordable payment every month and each creditor will receive their percentage. Since creditors won't be allowed to try to collect more payments, they won't be harassing you either.
Your debt to income ratio will play a huge role in how much of your total debt you will need to pay. You will go to court with your bankruptcy lawyer and show proof of your debts, income, and assets. The courts will decide how much of your debt you can reasonably pay. You may only need to pay a small percentage, or the entire amount. Other considerations for your payment will include:
- Disposable income
- Secured debts
- Mortgage arrears
- Nonexempt property
Stopped Late Fees
As soon as your bankruptcy is filed, you will not acquire any more late fees. Even better, when the court calculates your entire debt, the late fees will not be included in the calculation. All of the late fees that you have acquired since the bills started coming in will be erased.
Reduce Car Payments
When you file bankruptcy, you may have the option of lien stripping. This is where your secured debt is modified to meet the value of collateral. When you have a car loan, the amount you owe on your vehicle can be reduced to the value of car. You will modify your loan to reflect the new amount that you owe. However, eligibility varies. If your vehicle was a recent purchase, lien stripping won't be available to you.
Although your debts will be consolidated, it's still an additional bill that you are going to have to pay. If you don't have much disposable income, it could be a serious issue for you. You still have to make the same payments on your current obligations like your mortgage, car payment, and utilities. If you don't make your payments for your repayment plan on time, you will have to pay late charges.
Chapter 7 bankruptcy is common and simple. You prove that you don't have a high income or significant assets to liquidate and the courts wipe away your debt. After the paperwork, it is a simple filing process. Chapter 13 is very different. It's a long and complicated process, which leads to much higher attorney fees.
Drop In credit Score
Filing bankruptcy will eventually raise your credit. Unfortunately, you have to put up with a drop in your credit first. Your credit will commonly drop around 200 points after you file bankruptcy. Although your credit will begin to rise as you pay off your creditors, your bankruptcy will show on your credit report for 7 years. This can impact your ability to obtain a mortgage, a car loan, or even potential employment.
Filing bankruptcy can clear you of some overwhelming debt. You won't have to worry about your home foreclosing and late fees accumulating on all of your bills while your credit continues to drop. If you can handle the debt payment, attorney fees, and the temporary drop in credit score, filing chapter 13 bankruptcy may be right for you.