Chapter 13 Bankruptcy
Chapter 13 bankruptcy is the main alternative to Chapter 7. It’s not very well understood, and the success rate is about 0% if done without a bankruptcy attorney. It’s referred to as “reorganization bankruptcy” which pretty much tells you nothing. Reorganizing what? That’s useless. Here, I’ll put it in plain terms.
What is Chapter 13 bankruptcy?
Chapter 13 is a debt consolidation plan where you pay a bankruptcy trustee contracted by the federal government. Basically, you make a fixed payment for a fixed time. At the end, all unpaid debt is forgiven.
This sounds sweet. What’s the catch?
It’s not fun to make a lot of payments on your debt. Some people would rather just be done with it all, and not pay anyone. Plus, tax refunds typically get turned over to the Chapter 13 trustee during it. It trashes your credit like a bankruptcy, because it is one.
This doesn’t sounds fun at all. Why would someone do Chapter 13 bankruptcy then?
Better than Chapter 7
When you look at which is better to file Chapter 7 or 13, you’d file a Chapter 13 for a lot of reasons. Firstly, maybe you earn too much money to wipe it all out based on the means test for Chapter 7. Secondly, if you have home equity, there is no risk of losing your home here, compared to liquidation bankruptcy. Thirdly, you can file Chapter 13 bankruptcy without having to wait as long if you’ve previously filed Chapter 7. Fourthly, Chapter 13 doesn’t have… “complications” if you’ve transferred real estate or other questionable things before filing bankruptcy the way the other chapter does.
Better than Debt Consolidation
Chapter 13 is better than debt management or debt consolidation in a few ways. Firstly, Uncle Sam manages these, and the government will be around for a long while. Secondly, the payment is usually whatever you can afford, not what the credit cards demand from you. Thirdly, it freezes interest from accruing. Fourthly and best, credit cards can’t sue you in a Chapter 13 bankruptcy. Debt consolidation almost always results in a law suit.
I’m paying my credit cards now. Why should I pay them in a bankruptcy?
First, the magic of freezing interest. Your way without bankruptcy, you’re paying interest each month and hardly making any progress. In five years, you’ll still owe all that debt. In a Chapter 13, you pay 60 times and you’re done.
Also, you’re paying each company’s minimum payment. They don’t know or care about what other minimum payments you’re struggling with. Paying one consolidated payment is often less than what you’re already paying.
What can be included in a Chapter 13?
Glad you asked. Because there are payments, it gives you a chance to catch up on house lates and save a home from foreclosure. It also pays tax debt. Also, it can even take an upside-down car and save you thousands where you pay back only what it’s worth. Further, it can remove a second mortgage or home equity line of credit (HELOC). Oh and of course, it can include credit card debts, personal loans, and other unsecured debts.
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