If you do not pass the income tests in place for a Chapter 7 bankruptcy, then the other option available to you is a bankruptcy under Chapter 13. It is referred to a Chapter 13 bankruptcy because of its placement within the bankruptcy codes of the United States.
When a Chapter 13 bankruptcy is filed, your personal debts can be reorganized to reflect your current income trends. You can often pay just a portion of the debts after the bankruptcy to have them settled. Most debt will not be completely eliminated because of the bankruptcy filing, compared to a Chapter 7 bankruptcy.
List of the Pros of Bankruptcy Chapter 13
1. All accounts listed in the bankruptcy are removed after 7 years.
When filing a Chapter 13 bankruptcy, all individual accounts that are listed within the proceeding are removed from your credit report within 7 years. The bankruptcy will also appear for a maximum of 7 years.
2. Your assets are not at-risk of being sold.
When your debts are canceled under a Chapter 7 filing, creditors may have the option of requesting that some of your assets be sold to pay your debts. There are exemptions under a Chapter 7 that may allow you to keep a pension, a vehicle, a home, or personal property. If any property is non-exempt, then a trustee can sell the items to pay creditors.
In a Chapter 13 bankruptcy, you are reorganizing your debt, so there is no worry about having assets listed as being non-exempt.
3. There are no income tests involved.
Under a Chapter 7 bankruptcy, you are required to prove that your income levels meet the current requirements to petition for this financial maneuver. There is no such requirement for a Chapter 13 bankruptcy. Anyone, at any income level, is permitted to file for this chapter of bankruptcy.
4. You have more time to get out of debt.
For most people, a Chapter 13 bankruptcy extends the amount of time they stay in debt. That is because they are given more time to make payments through the restructuring process. Options may include reducing the amount of a payment, relinquishing property or an asset which requires a payment, or extending the number of payments required.
5. It is viewed more favorably by future lenders.
Because you are reorganizing your debt instead of canceling it, as you would be with a Chapter 7 filing, future lenders look at a Chapter 13 filing somewhat favorably. Any bankruptcy is harmful to your credit situation and will reduce your credit score. Because you are still making payments and taking responsibility for the debt, a future lender is often more likely to consider you for financing earlier than they would if you were simply trying to cancel your debt.
6. New lines of credit can be established rather quickly.
Many petitioners who file for a Chapter 13 bankruptcy are able to establish a new line of credit in 12-36 months. Because the bankruptcy lowers their credit score, the interest rates on the new line of credit will be higher than previous offers from before the bankruptcy. At the same time, those who do qualify for a Chapter 7 bankruptcy, but do not have debts canceled by it, can have their debts reduced under the Chapter 13 filing.
7. It doesn’t need to involve co-signers on the debt.
A Chapter 13 bankruptcy allows co-signers of a delinquent debt to be immune from the efforts of a creditor. The only stipulation to receive this specific advantage is that the bankruptcy plan must include a scheduled which allows for the full payment of the debt. In addition, you have protection against the foreclosure of your home under this bankruptcy chapter.
8. You are permitted to separate creditors into classes.
By being able to separate creditors into different classes, you’re able to distribute the percentages of your payments in a way that maximizes the help your finances receive. One of the primary advantages here is that any debts incurred with a co-debtor can be treated differently than debts that are incurred individually.
9. It may reduce your debt obligations.
Under the structure of a Chapter 13 bankruptcy, there is the possibility that your original debt obligations may be reduced. That might mean a reduction of principal, interest, fees, or any combination of the three.
List of the Cons of Bankruptcy Chapter 13
1. It remains on your credit record for up to 7 years.
Although a Chapter 13 bankruptcy stays on your credit for three years less than a Chapter 7 filing, it will still be logged for up to seven years. It will appear on your credit report as a public notice or public record item. Many states in the U.S. have requirements which require debts to be removed in 6-10 years with inactivity and under the Fair Credit Reporting Act, information can be included for 7 years.
2. Your plan must usually be at least 3 years in length.
The actual length of time you spend in the repayment plan of a Chapter 13 bankruptcy is dependent upon your income. If you have extensive debt, the amount of time you need to pay it off will also factor into the repayment plan. Most plans are usually at least 3 years in length, with some up to 5 years in length.
For households with an income level above the state median, a 5-year plan is almost mandatory. Longer plans can mean shorter payments, though it also means you’ll be dealing with debt for almost the entire time the bankruptcy remains on your credit record.
3. Your disposable cash will be tied-up in payments.
While you are in the repayment plan period, any disposable income you have after meeting your necessities is directed toward your debt. That means your disposable income has limited power for certain comforts, such as taking a vacation, until the debts are satisfied. Medical care is considered a necessity, as is your home, your food needs, and certain other costs. You’ll receive a full breakdown from the trustee as to what qualifies for you and what does not.
4. Big ticket items are out of the question for the foreseeable future.
Once the bankruptcy appears on your credit report, it will be difficult to obtain lending for big-ticket items until it drops off the report. That means if you don’t already have a mortgage, you will find it difficult to purchase a home. It may be difficult to obtain financing for a vehicle without paying an extremely high interest rate.
5. There are still income and debt limits that apply.
The total amount of debt you are permitted to have under a Chapter 13 bankruptcy is just under $1.4 million. Your unsecured debts must total less than $383,000, while secured debts must be $1 million or less. These figures have risen after the housing issues in 2007-2009 which caused numerous foreclosure proceedings to start. If you do not qualify under the Chapter 13 rules and do not pass the Chapter 7 tests, then you may not be allowed to file for a bankruptcy at all.
6. You are no longer permitted to file a Chapter 7 bankruptcy.
If you qualify for a Chapter 7 bankruptcy, you should file under that chapter first. You cannot file a Chapter 7 bankruptcy for a minimum of 6 years after you file for a Chapter 13 bankruptcy. In addition, you cannot file for a Chapter 13 bankruptcy within 180 days of having a previous petition dismissed. That can put additional strain on your finances which may make it difficult to restructure your debt if there are further financial difficulties in the future.
7. Some people cannot file for this type of bankruptcy.
Individuals and married couples filing jointly are the only petitioners accepted under a Chapter 13 bankruptcy. Businesses that are LLCs or corporations must file for a Chapter 11 bankruptcy instead. Even sole proprietors can only file on debts that have a personal liability to them – any business liabilities would not be covered. Commodity brokers and stockbrokers are not eligible for a Chapter 13 bankruptcy whatsoever.
8. You need to file your income tax returns.
As part of the Chapter 13 process, you are required to provide proof of your U.S. income tax returns for the previous 4 years. If you have a state income tax filing, the past 4 years of them must be provided as well.
The pros and cons of a bankruptcy in Chapter 13 show us that restructuring certain debts can be helpful to your financial picture. It should be noted, however, that any priority debts, such as alimony, child support, and certain taxes must be paid in full. Some secured debts, such as a car loan or a mortgage, will survive the bankruptcy as well. The advantage you gain is that a new repayment plan can be generated, which will hopefully have you coming out stronger financially in 3-5 years.
Blog Post Author Credentials
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to contact Natalie, then go here to send her a message.