Bankruptcy can help provide debt relief and stop foreclosure actions. Chapter 13 bankruptcy is intended to protect individuals and families instead of businesses. It has advantages and disadvantages and other components that should be considered.
Chapter 13 follows Chapter 7 as the most common bankruptcy. The debtor's finances are reorganized and a plan is formulated for repayment of loans within a certain timeframe. Filing for Chapter 13 requires consistent wages and providing updated tax returns. Credit card, student loan and other unsecured debt cannot exceed $394,725. Mortgage, car loan and other secured debt cannot be over $1,184,200.
Chapter 13 differs from Chapter 7 by having income requirements and limits for secured and unsecured debt. Chapter 13 is also distinguished because is does not allow for the liquidation of assets, such as the family home or car, to pay off debts. Because assets may not be liquidated, Chapter 13 is usually a longer process, generally lasting three to five years.
Like other bankruptcies, debtors must take credit counseling classes. A trustee is appointed to oversee the case. A payment plan must be developed and approved by the court. Overdue spousal or child support must be paid in full. A realistic plan must be made to pay back secured debt, such as a mortgage.
Keeping homes, vehicles and other assets is a major advantage of Chapter 13 bankruptcy. It may also stop co-signers on loans from trying to collect on them. The longer period can be either a plus or minus. It may prolong the period of stress, but also provides a realistic opportunity for making payments and having the debts discharged.
One of the biggest disadvantages, however, is that meeting the ongoing income requirement is not assured. Three to five years is a long time and a debtor may lose a job, unemployment may last longer than anticipated or a debtor may suffer an accident or illness and face medical bills.