Is Chapter 13 Right for You?

If you struggle to repay your debts, you may consider debt relief in the form of bankruptcy. Bankruptcy has the potential to drastically improve your finances and overall quality of life, but before you file, you need to determine whether you want to file for Chapter 7 or Chapter 13.

Chapter 7 bankruptcy is a complete liquidation bankruptcy. You basically forfeit all your assets in exchange for freedom from having to repay your liabilities. The bankruptcy trustee sells your assets and uses the proceeds to repay your creditors. In a Chapter 13, however, you must still repay your debt. However, the bankruptcy trustee restructures it so it is easier for you to manage. Credit Karma explains the ins and outs of Chapter 13 bankruptcy.

Chapter 13 Is a “wage Earner’s” Plan

Many people refer to Chapter 13 bankruptcy as a wage earner’s plan because it is best for people who have the ability to repay at least some of their debt. If you have a regular income, you can restructure your debt into a three- to five-year repayment plan. To come up with a repayment amount, you and the trustee would go over your income and expenses to determine how much you can realistically afford to repay each month.

If the court approves the proposed plan and repayment amount, you would make payments to the trustee for the duration of the bankruptcy. The trustee is responsible for paying your creditors in order of priority, with child support, tax obligations and student loans taking utmost priority, and unsecured debt, such as outstanding credit card debt, taking the least priority.

Benefits of Chapter 13 Bankruptcy

Chapter 13 bankruptcy comes with several benefits, the most notable of which is its ability to allow you to keep your assets. If you are behind on mortgage payments, Chapter 13 gives you the chance to catch up and potentially save your home from foreclosure. The same goes for other assets, such as your car, a boat, artwork, jewelry and the like.

Chapter 13 also consolidates payments, as you pay the trustee one lump sum each month, who then pays your creditors. In many cases, the trustee will also negotiate with lenders for lower and more manageable payments.

Chapter 13 is also better for your credit. Though filing for bankruptcy of any kind will hurt your score, Chapter 13 only stays on your report for seven years, as opposed to the 10 associated with Chapter 7.

Finally, at the end of the three- to five-year term, the bankruptcy courts will discharge the remainder of your debt. This is the case even if you did not repay it in full.