Advantages and Disadvantages of Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a way of restructuring serious debt when you don't qualify for chapter 7 under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It allows you to become completely debt-free over a 3 to 5 year period and protects non-exempt assets, such as a second home or stocks and shares. You will be expected to make a payment to a trustee from your disposable income each month.

Advantages of Chapter 13 Bankruptcy

Write-off serious debt. Provided payment is made to the trustee for the full 3 to 5 year duration, any remaining debt is written-off. You will be completely debt-free at the end of the term.

Keep non-exempt assets. The current law allows you to keep non-exempt assets that would be lost if filing under chapter 7.

No legal action. It will stop further legal action. Full court protection is provided from creditors.

Stop home foreclosure. Serious debt is restructured and this helps to make mortgage payments more affordable. The foreclosure process comes to an abrupt halt whilst affordability is established and any mortgage arrears are cleared.

Flexibility. The terms of credit agreements are far more flexible than they once were.

Disadvantages of Chapter 13 Bankruptcy

Monthly payment. You will be expected to make a payment each month from any available disposable income for the full 3 to 5 year duration.

FICO score. Filing under chapter 13 will cause your credit score to plummet and it will show for a period of 7 years. However, your FICO score will start to improve after a couple of years, provided other repayments are made on time.

Borrowing money. It will be far more difficult to borrow money. All loans will be at a far higher rate of interest than was previously the case.

Not all debts can be cleared. It is not possible to write-off secured debt, student loans, car loans, alimony and money owed to the IRS. However, it will be possible to restructure it to aid affordability.

Mortgage lien. It may not be possible to remove a mortgage lien that is already in place.

Chapter 13 Bankruptcy will help if you have serious debt and don't qualify under chapter 7 rules due to either an income above the state median or non-exempt assets. There are other debt solutions, such as debt settlement program or Debt Management Plan, available to those who can afford to offer a monthly payment to creditors.

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.