bankruptcy chapter 13: What You Need to Know

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Is Chapter 13 Bankruptcy Right for Me?

Bankruptcy is a hard process, filled with tough decisions, from whether or not to even file to whether to file for bankruptcy chapter 13 or chapter 7. Because bankruptcy has such profound consequences on your credit and your life, it is helpful to know all you can about filing. New bankruptcy laws passed in 2005 make it harder for people to file for chapter 7, leaving chapter 13 as an alternative. Is it right for you?

Chapter 7 bankruptcy is often referred to as a “fresh start” because the debtors’ assets are liquidated and all eligible debts are discharged. In addition, there are exemptions which allow debtors to keep certain assets like homes (the homestead allowance varies from state to state).

In order to qualify for this “fresh start,” you have to pass the bankruptcy means test. This is a formula that determines if debtors have adequate income to make minimal payments. If they do, then they must file chapter 13 bankruptcy. Chapter 7 is reserved for those who have no ability to pay and the purpose is to make sure creditors are paid something, even if only a fraction of the original debt. The means test compares your income with others in your state with families of the same size. It also looks at how much unsecured debt you have and your level of disposable income.

If it is determined that you have $10,000 or more of disposable income in the next five years, then you have to file for chapter 13. Chapter 13 involves reorganization of debt and helps you make payments to your creditors. Here are some advantages of filing for bankruptcy under chapter 13 as opposed to 7:

  • Your case can be handled much more quickly. With chapter 7, you cannot file until all your fees are paid. Chapter 13 allows you to proceed and pay your fees as part of your repayment plan.
  • Chapter 13 costs less to file.
  • Chapter 13 bankruptcy stays on your credit report for seven years, as opposed to ten with chapter 7.
  • You keep all your assets. If you are behind on mortgage or car payments, you can pay over time with chapter 13. You cannot do this with chapter 7 because the assets are liquidated.
  • You may be able to remove liens from your property with chapter 13.
  • More debts are eligible for discharge than with chapter 7.
  • You can include debts like student loans and tax debts in your chapter 13 repayment plan – these debts are not discharged under chapter 7.
  • It is easier to reestablish your credit after filing for chapter 13 bankruptcy. Chapter 13 demonstrates a willingness to pay debts, which is what creditors look for.

If you have to file for bankruptcy, chapter 13 may be the best way to go in terms of rebuilding your life after. You can establish better credit, keep your home, and regain the ability to pay off your debts. No matter which type of bankruptcy you file, make sure you have considered all your options, such as budgeting your money more effectively or finding a reputable debt settlement company.