Finding yourself in financial difficulties is a stressful, worrying, and often confusing experience, and there are likely to be times when you just don’t know where to turn.
Bankruptcy is an option for those who have exhausted all other options, and who are left with this as a last resort in order to pay their debts and meet their financial obligations.
There is often a great deal of confusion surrounding what you can and cannot do when you file for bankruptcy, and the feat of getting things wrong is often very real.
What Is Chapter 13?
Before we get into the nuances about what you can and cannot do during a Chapter 13 bankruptcy, it is worth taking a little time to explain exactly what we mean by this.
A Chapter 13 order refers to a type of bankruptcy processing, in which the debtor has a chance to repay some or all of their debts to creditors. With Chapter 13, your debts and finances will be reorganized under the strict supervision of the court, and they will need to approve your decision before you will be eligible for this path.
Chapter 13 bankruptcy is often considered the most flexible option, as it is open to both married couples and individuals, self-employed workers, or those in traditional work.
A Chapter 13 order requires the debtor to compile a list of all creditors and the amount that is owed to each party. You must also compile a list of any property that you own, a detailed breakdown of your income and earnings, and a detailed list of all your monthly expenses.
Once all of this information has been gathered, the debtor will then be responsible for paying a monthly plan, lasting between three and five years, to help their creditors recoup some of the outstanding balance that is owed to them.
Money will be paid in a single installment to a neutral, impartial trustee, who then, in turn, shares the amount between the creditors. This eliminates the requirement for debtors to have any contact with their creditors, and this can be a welcome relief.
In some cases, you may be expected to hand over your entire disposable income to pay your debts – a Chapter 13 plan requires that the repayment plan must offer a substantial payback to your creditors.
In order to be eligible for Chapter 13, your debts must be below $419,275 for unsecured debt and $1,257,850 for any unsecured debt. You will also be required to undergo mandatory debt counseling prior to being granted approval for a Chapter 13.
Chapter 13 Versus Other Chapters
Despite the need to hand over potentially all of your income, Chapter 13 remains a popular option because it allows you to keep your house.
This makes it an appealing alternative to Chapter 7, which essentially allows debtors to wipe their debts, and start afresh – the downside of this is that you will be required to surrender your house as part of the payment.
Pros and Cons of Chapter 13
When considering whether to go for Chapter 13, it is worth weighing up the pros and cons and we will explore these below.
- You do not have to have contact with your creditors while you are making your repayments – all contact goes through your trustee.
- You will be able to keep your property, and any foreclosure proceedings that are in the process of being taken against you will be paused.
- You can gain more time to pay off your debts.
- Any secured debts, for example, a car loan, can be restructured, and the terms can be extended to cover the length of your Chapter 13 repayment plan – this can cause your monthly payments to drop. This cannot be used for mortgages on your primary residence, however.
- Co-signers for consumer debt – that is, something purchased solely for the home or family – are covered and protected.
- This can be a lengthy process, and take up to 5 years to complete compared to the 4-6 months for Chapter 7.
- A Chapter 13 will stay on your credit report for seven years – this is still less than the 10 years required for a Chapter 7.
- You will be short of cash, as all of your disposable income will be tied up in debt payments or living expenses for around five years
- You could find it more difficult to get credit in the future
- If you file for Chapter 13, you will find it harder to file for Chapter 7 in the future – there is a six-year restriction.
Will I Be Eligible For Chapter 13?
One of the perks of Chapter 13 is that it has wide eligibility criteria for individuals (businesses are not eligible for Chapter 13). Individuals and married couples are eligible, provided that their unsecured debts are not in excess of $419,275, and their secured debts do not exceed $1,257,850.
To be eligible, you must also have filed both state and federal income taxes for the last four years, and you must not have had a previous petition for bankruptcy dismissed in the last 180 days as a result of your failure to comply with orders of the court or appear in court.
This also applies if your petition was voluntarily dismissed by your creditors.
Before you can file, you must undergo mandatory credit counseling from an EOUST-approved agency, and this must occur a minimum of 180 days before you file for Chapter 13 – this is an important criterion of your filing, and your certificate of completion will need to be filed with the rest of your papers when you take your details and documents to the court.
Can I Have A Credit Card Under a Chapter 13 Order?
Another downside of a Chapter 13 filing is that you are not permitted to keep or retain any credit cards when your case is accepted – all of them must be handed over.
This is because a Chapter 13 ruling notes that are not permitted to be seen to be favoring any creditors over any others, Keeping your credit card could indicate that you plan to still use and pay it off and that you are therefore favoring this creditor.
As a result, you will need to cut up all existing cards and will not be permitted to apply for new ones.
Filing for bankruptcy is a scary process, but a Chapter 13 ruling offers you the chance to start again, gain control of your debts and finances, and make sure that you protect yourself from serious court action.
It is a good idea to talk your options through with a lawyer or debt expert before you make any final decisions.