What Happens When You File For Chapter 13 Bankruptcy?

If you currently have more debts than you can pay off, and are unable to find another solution (for example debt consolidation), then you may have to file for bankruptcy. Filing for bankruptcy as an individual, means you will have to meet the terms for one of the available types of bankruptcy for someone in your situation. For the majority of people this will be either chapter 7 or chapter 13.

How Does Chapter 13 Differ from Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is generally considered the more “extreme” of the two, as it is harder to pass the means tests to file for it, and it generally requires you to pay less to your creditors. Under chapter 7, your liquid assets (not including any assets deemed exempt in your state), are reclaimed and divided up between your creditors. Your debts are then all discharged immediately, and it becomes unlawful for creditors to persist with trying to reclaim money from you.

Chapter 13 is a longer process where you are bound to pay monthly amounts to creditors for a period of three to five years. These repayments will be ordered in terms of priority, with things like child support being considered essential, and unsecured debt (such as credit card bills) coming last. In a lot of cases, these creditors end up getting very little money, but it still usually works out better for them than chapter 7, which often sees these low priority creditors get nothing.

Chapter 13 is available to people who earn over the median income in their area for their size of household, and who aren’t therefore eligible for chapter 7. Some people who may be eligible for chapter 7 choose chapter 13 instead, because it means they have a chance to keep some assets provided they keep making repayments and can keep the assets insured (this usually relates to cars).

What Happens When You File Under Chapter 13?

The first thing you’ll need to do is see a chapter 13 bankruptcy attorney, who will be able to assess your case and work with you to propose a payment plan. Even before the payment plan is agreed, you will need to make payments to the court which will go towards your creditors. The payment plan is the most important part of chapter 13 bankruptcy, and you will need to prove that you are entering into it in good faith. Fraudulent bankruptcy claims are taken very seriously by the US legal system.

Once the payment plan becomes active, which usually happens within a few weeks of submission to the courts, all you need to do is keep paying it every month. There are some restrictions which you will have to be subject to for the length of the plan, which will most likely prohibit you from taking on any new debt. Then, once the period of your chapter 13 plan is over, the remainder of your debt will be discharged and restrictions on your finances will be lifted. It is worth being aware, however, that you will find it harder to secure credit due to the effect on your credit rating.

Today’s guest author, Monica Smith, is a financial consultant at the GoldBach Law group, a law firm providing affordable bankruptcy solutions. She is an ardent blogger and likes to share her views on a variety of topics in her articles.

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