Before deciding to file bankruptcy or choosing which chapter might be right for you, we recommend assessing the full range of potential advantages and disadvantages of any given option. In some cases, you may only qualify for one chapter, but you will still want to know the pros and cons before filing your petition.
Chapter 13 is often what people file when they make too much money (or own too many assets) to qualify for Chapter 7. The following is a brief overview of the potential advantages and disadvantages of Chapter 13 bankruptcy. Keep in mind that this is general information, and the unique factors of your situation will influence the results of your case.
Advantages of Chapter 13
If you file Chapter 13 with help from a skilled attorney, you can benefit from:
- A smaller effect on your credit. While Chapter 7 cases remain on your credit report for ten years, Chapter 13 only stays for seven years.
- An automatic stay that lasts 3-5 years. Bankruptcy triggers the automatic stay, a court order that stops all collection actions. Because Chapter 13 lasts for the duration of your repayment plan, you will have 3-5 years of protection against collectors.
- The potential for lien-stripping. If you have a second and/or third mortgage, the court may strip the lien of the mortgage(s), which removes your lender’s contractual right to foreclose your home. To qualify, you must owe more on your first mortgage than what your home is worth.
- The potential for a cramdown. In bankruptcy, a “cramdown” is when the court issues an order despite objections from creditors. Typically, this refers to when the court reduces your secured loan to the fair market value of the property. Loans for vehicles, furniture, and other possessions may be eligible for cramdowns (but not real estate).
- No risk of liquidation. While Chapter 7 involves a liquidation process (i.e. when the trustee sells your nonexempt assets to repay creditors), Chapter 13 involves a 3-5-year repayment plan. So long as you complete all monthly payments, the trustee will not need to liquidate your assets—no matter their value.
- More time to resolve delinquencies on secured debt. If you fell behind on mortgage or auto loan payments before your bankruptcy, the automatic stay will keep lenders at bay while you catch up on payments over the life of your 3-5-year plan. This can help you avoid repossession or foreclosure once your bankruptcy ends.
- More time to negotiate with lenders. In addition to stretching delinquent payments over the course of the 3-5-year repayment plan, some filers choose to negotiate with their lenders for better terms (e.g. lower interest rate, extension of terms, etc.) during their case.
Disadvantages of Chapter 13
Despite the powerful benefits listed above, Chapter 13 may have a few downsides, including:
- A longer timeframe. Chapter 13 takes 3-5 years to complete, while Chapter 7 only takes 4-6 months. Because the process takes longer, Chapter 13 is also more expensive.
- The obligation to repay a portion of your debt. While Chapter 7 allows you to receive a debt discharge without repaying any of your debt first, Chapter 13 requires you to make monthly payments for several years. Fortunately, the rest of your qualifying debts can be discharged once you complete your plan.
- A lower likelihood of success. Statistically, more people successfully complete Chapter 7 bankruptcy than Chapter 13. This is, of course, because Chapter 13 requires monthly payments for several years. You should only consider Chapter 13 if you have a steady source of income and, therefore, confidence that you can complete the entire plan.
Finding the Best Possible Debt-Relief Strategy
Are you unsure whether Chapter 13 will accomplish your goals? Determining the most effective path may be a challenge without professional insight and guidance. When you bring your case to US Legal Group, APC, you can depend on our attorneys to closely analyze your situation and provide fully personalized recommendations. We can help you decide whether Chapter 13 is right for you and, if not, explore all other options at your disposal.