A Chapter 13 bankruptcy filing consists of a reorganization or repayment plan in which the debtor makes payments to a trustee over a 3 to 5 year time period. Most Chapter 13 cases are filed for debtors who are trying to prevent a foreclosure of their home or repossession of their vehicle. Some Chapter 13 cases are filed because the debtors are not eligible to file a Chapter 7, either because they have filed a prior Chapter 7 in the previous eight years, or they have too many assets, or they make too much money, or because they could pay their creditors a good percentage of what they owe (they did not pass the Means Test). Some clients will file a Chapter 13 repayment plan even if they qualify for a Chapter 7 just because they want to pay their creditors.
Chapter 13 is usually the preferable way to file in any of these situations:
- You want to catch up on mortgage payments.
- You need time to pay off past-due support obligations.
- You owe tax debts that you want to pay off without interest or penalties.
- You received a discharge in a bankruptcy case filed within the past eight years.
- You earn enough money to pay monthly expenses with ease and want to do your best to repay creditors at least some of the amount you owe.
Advantages of a Chapter 13 filing
As a general summary the benefits of a Chapter 13 filing are as follows:
- You can get your house and car payments up to date over the life of the plan.
- Your overdue alimony and child support can be stretched out and paid off over three to five years.
- You can reduce payments on some secured loans to the value of the collateral. For example, if you owe $5,000 in car payments and the vehicle is worth only $2,000, then you only pay the $2,000.
- You get to keep all your personal possessions.
- You can get some bankruptcy relief even though you received a discharge in a prior Chapter 7 filing.
- You can protect a co-signer from creditor harassment by proposing to pay the cosigned debt over the life of the plan.
- You can pay your taxes over time, possibly, without interest or penalties.
However, if your federal tax obligations are more than $10,000 and the only source of unmanageable debt, an Offer in Compromise might be the better route and we can help with this as well.
Disadvantages of a Chapter 13 filing
The one obvious disadvantage of a Chapter 13 filing is that it takes at least three years to complete. During this time:
- You may feel like you're on a leash ... because you are.
- You'll probably have to give up your income tax refunds.
- You'd lose any unexpected windfalls to the trustee.
- You won't be allowed to incur any more debts without the trustee's consent.
- You risk dismissal of your case should you lose your job and be unable to maintain payments.
- You may risk losing your homestead exemption if you move or sell your home.
A word of caution. Two-thirds of Chapter 13 plans fail and then the bankruptcy protections disappear. Debt collectors are back at your door and in hopes of obtaining some repayment, they could even could force you into a Chapter 7 filing.
Contact a DuPage County Foreclosure Defense Attorney
Call 630-296-5084 or contact our Naperville law firm online to learn more about bankruptcy and other debt relief options.