Advantages And Disadvantages Of Chapter 13 Bankruptcy

Most people who are considering filing bankruptcy have heard that bankruptcy can wipe out some unsecured debts and that it can stop creditors from calling and trying to collect. Most have also heard of both a Chapter 7 and a Chapter 13. Many want to know what are the advantages and disadvantages of Chapter 13 bankruptcy.

Some of the advantages are:

First, a Chapter 13 bankruptcy is easier to qualify for than a Chapter 7 bankruptcy. This is because, under a Chapter 13, a person pays his creditors either all or a portion of what the person owes to the creditor.

Second, in a Chapter 7, a person's property that is not exempt is sold and the net proceeds are paid to his creditors. In a Chapter 13 bankruptcy, property is not sold. Rather, a person's debts are paid from the person's income. The result is that the person keeps his property.

Third, for a person facing mortgage foreclosure, a Chapter 13 bankruptcy helps in several ways. Initially, it stops a mortgage lender from proceeding with a foreclosure action until the bankruptcy courts gives the creditor permission to proceed with the foreclosure. Next, in many foreclosure cases, the borrower is several months behind in his mortgage payments and the lender demands a lump sum payment for the arrearage. A Chapter 13 allows a person to pay the arrearage over time, normally 3 to 5 years. This makes it easier to catch up on the mortgage.

Forth, with some secured debts, a person can ask the bankruptcy court to reduce the debt to the present value of the property. This action allows a person to keep some property and essentially pay less for the property than the original purchase price.

Some of the disadvantages are:

A Chapter 13 bankruptcy is a bankruptcy court approved payment plan with payments paid to a Trustee who pays the creditors. During the payment plan, creditors are paid all or a portion of the amount that they are owed. For debts to be discharged (meaning that a person doesn't have to pay the debt and the creditor cannot take action to collect the debt) a person has to complete the entire payment plan. So, if a plan calls for a creditor to receive a portion of what it is owed, but the debtor stops paying according to the plan, the debt will not be discharged and the full debt will be owed to the creditor. Unfortunately, many people are not able to keep up with the payment plan.

Another disadvantage is that a Chapter 7 bankruptcy will be over in 9 to 12 months. A Chapter 13 bankruptcy goes on for 3 to 5 years.

A disadvantage that is not normally mentioned is that Chapter 13 bankruptcies cost more because they require more work to set up and maintain. And this additional work means that a bankruptcy attorney will charge more for a Chapter 13. Also, the debtor has to pay the bankruptcy Trustee for his handling of payments (remember that the debtor pays the Trustee who then pays the creditors).

This is general information. If you need specific information or have any questions of any nature whatsoever, talk with a lawyer licensed in your state.

For more general information, see Bankruptcy. For more detailed information see Chapter 13 Bankruptcy.

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