When is Filing Chapter 13 Bankruptcy the Right Choice?

Filing chapter 13 bankruptcy may not be the best debt-free solution for every set of personal circumstances so it is important to establish when it would be most beneficial to you. Unlike chapter 7 bankruptcy, you will need to be able to offer your creditors a payment each month for a 3 to 5 year period. At the conclusion, any remaining debt is completely written-off. Your credit score will be affected for a period of 7 years, although it will start to improve after a couple of years provided that repayment is made on other credit agreements.

Non-exempt Assets

The laws were reformed in 2005 to prevent individuals filing under chapter 7 when non-exempt assets could be used to pay-off your debts. You may have too much home equity, jewellery, a valuable collection or a sports car that you'd like to keep hold of. These items would normally be sold by the trustee to help reduce the amount you owe. However, making a payment under chapter 13 may allow you to keep all or most of these possessions.

Stop Foreclosure Sale

If you are in arrears on your mortgage, filing chapter 13 bankruptcy can help stop foreclosure sale. Full legal protection is provided whilst your debts are fully restructured. This gives you time to devise a suitable repayment strategy to get your mortgage back on track. Before proceeding, it is important to consider other options, such as a loan modification or short sale.

High Unsecured Debt

Individuals with substantial credit card debt, medical bills and other unsecured debts are likely to find that filing chapter 13 bankruptcy is the right debt-free solution. You won't be able to write-off secured debt, student debt, car loans, alimony or taxes due to the IRS. However, these debts can be restructured with full legal protection.

Recently Filed Under Chapter 7

Whilst chapter 7 may offer the best debt-free solution, this may not be possible because you have already filed within the last 8 years. This is a common problem for those who have accrued medical debt and experience the same health problem again. Pre-existing medical conditions are rarely covered by health insurance coverage.

Filing chapter 13 bankruptcy allows you to stop foreclosure sale, clear unsecured debts and protect non-exempt assets. There are a number of other ways to solve financial difficulties, including a debt settlement plan and a Debt Management Program. Although a formal requirement when declaring bankruptcy, always talk to a qualified debt counselor before proceeding with any debt solution.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.

Updated: 22 March 2011