Chapter 13 bankruptcy - What are the advantages and disadvantages?

Chapter 13 bankruptcy is meant for individuals willing to pay off their debts within a period of 3-5 years. Chapter 13 (also called "Wage earner's bankruptcy") helps individuals or small scale business owners retain non-exempt properties and pay back the creditors under a repayment plan. This type of bankruptcy provides you with an alternative to the liquidation process of Chapter 7 bankruptcy.

Who qualifies for Chapter 13?

Chapter 13 can be filed by:

• Individuals having regular income.
• Individuals not having more than $250,000 in unsecured debt and more than $750,000 in secured debt.

When should you file Chapter 13?

It is a good idea to file Chapter 13 bankruptcy when:

• You're behind on your mortgage and need relief from debt.
• You want to protect your assets from liquidation under Chapter 7.
• You can't qualify for Chapter 7 due to high disposable income.
• Farmers do not qualify for Chapter 12 and want to get rid of debt.

What funds can you use to pay debts under Chapter 13?

You can use the following sources of income to pay your bills under a Chapter 13 repayment plan.

• Any kind of wages or business profits.
• Pension payments.
• Social Security benefits.
• Child support or alimony.
• Earnings from royalties and rents.

What are the advantages of filing Chapter 13?

The advantages of filing this type of bankruptcy are given below:

• You can keep both exempt and non-exempt properties.
• Debts that cannot be discharged by Chapter 7 can be reduced under Chapter 13.
• Chapter 13 helps avoid wage garnishment.
• Co-signers will be protected under this Chapter.
• Foreclosure on a home can be delayed.
• Chapter 13 can be filed immediately after Chapter 7 discharge to pay off any remaining liens.
• Offers the provision under which interest rates on certain loans can be reduced.
• Payment term on most debts can be extended under Chapter 13.

What are the disadvantages of Chapter 13?

The disadvantages of this type of bankruptcy are:

• Chapter 13 bankruptcy will appear on your credit report for 7 years.
• Borrowing a large sum of money may be difficult as creditors may question your credibility.
• The repayment period after Chapter 13 filing hampers your usual living standards as you're put to a rigid budget.
• Not all debts are discharged under Chapter 13.
• Legal fees may be higher.
• The amount of debt you can discharge under Chapter 13 is limited.
• Stock brokers and commodity brokers are not allowed to file a petition under Chapter 13 bankruptcy.
• After you get a bankruptcy discharge, you can get credit only at high interest rates.
• You need to pay extra costs like trustee's fee, attorney and court fees, etc.

Chapter 13 bankruptcy does provide you with a way out of debt but prior to filing it, you need to explore other options such as debt consolidation, settlement or debt management. Such options will help you pay your debts comfortably, so that you can avoid being harassed by creditors or collection agencies.