The Bankruptcy Abuse Prevention and Consumer Protection Act was introduced to prevent people from escaping their debts when they are in a position to repay some or all of the money they owe. Although filing chapter 7 is the preferred debt free solution for negotiating serious debt problems, it isn’t always possible. A debtor will file for chapter 13 bankruptcy when they have filed chapter 7 in the past 8 years, have an income that is above the state median or have non-exempt assets that they don’t want to hand to a trustee.
Advantages of Filing Chapter 13 Bankruptcy
- Court protection from collection agencies. Once the petition has been lodged with the court, it is illegal for a creditor to contact the debtor for the purpose of recovering their money. Other debt solutions, such as a debt settlement program, don’t offer the same legal protection.
- Get out of debt. Most forms of unsecured debt, including credit cards and loans, can be cleared for just cents on the dollar. Secured debts cannot be written-off, unless the collateral has been sold and there is a repossession deficiency. Interest and charges will also be frozen.
- Debt restructuring. All unsecured and secured debts will be restructured and an effective repayment plan put in-place. This not only provides light at the end of the tunnel, it can also offer peace-of-mind for people who have been struggling with personal debt problems for quite a while.
- Prevent foreclosure. Although most people file for bankruptcy to get out of debt, filing can also stop foreclosure. An appropriate repayment plan can then be drawn-up to clear any arrears.
- Non-exempt assets. It may be possible to keep non-exempt assets, such as a second home or car, in return for a monthly payment to a court-appointed trustee.
Disadvantages of Filing Chapter 13 Bankruptcy
- Repayment plan. Unlike filing chapter 7 bankruptcy, it is necessary to offer a payment to creditors from disposable income over the next 3 or 5 years.
- Secured debt. The current bankruptcy laws require secured debts, such as car loans and mortgages, to be negotiated and repaid under a separate, affordable agreement. Should the filer wish to keep the asset, it is necessary to reaffirm the debt.
- Non-payment. Failure to maintain the repayment schedule under chapter 13 could lead to chapter 7 and the loss of any non-exempt assets. If ineligible for chapter 7, collection agencies will once again be able to contact the debtor for full repayment.
- Bad credit score. Opting to file for chapter 13 bankruptcy will show on a credit report for the next 7 years. This makes it more difficult to get credit approval. However, there are steps that can be taken to improve post-bankruptcy credit ratings more quickly.
File for Chapter 13 Bankruptcy vs Debt Settlement Program
When chapter 7 isn’t an option, it is necessary to decide whether to file chapter 13 bankruptcy or proceed with a bankruptcy alternative. Both debt free solutions involve making a repayment to creditors and will show on a credit report for 7 years. Only chapter 13 offers full court protection from creditors. A debt settlement plan is often seen as a more socially acceptable option as the matter won’t be made public. It won’t be necessary to hire a bankruptcy attorney, but there will be a 15% management charge.