If you are struggling financially and considering bankruptcy, one of your concerns may be losing your home or other property, such as a vehicle. You generally have two types of bankruptcy available to you: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy dismisses all qualifying debts. However, if you own assets such as a home, you could be required to sell your home to pay the debts.
Perhaps you have a steady income and have simply fallen behind on mortgage payments or had an unexpected event that caused your debt to pile up. In this case, you could be better off filing Chapter 13 bankruptcy.
What is Chapter 13 bankruptcy?
Rather than discharging all your qualifying debt, a Chapter 13 bankruptcy involves creating a repayment plan. You execute this plan over a period of 3-5 years.
You must have a steady income in order to be eligible for Chapter 13 bankruptcy and show that you are able to make the monthly payments.
Chapter 13 is a good option if you want to keep your home or other assets. Mortgage and car loan companies are secured creditors, which means that they have an asset they can foreclose on or repossess if you do not make payments.
You typically cannot reduce the overall balance owed to secured creditors in Chapter 13 bankruptcy, but this could be a possibility with unsecured creditors.
Credit card debt or medical bills are examples of unsecured debts. When you negotiate your payment plan, you may be able to persuade unsecured creditors to accept less than the total owed balance.
Who do I make payments to?
The goal is to achieve a payment plan that allows you to pay off as much of your debt as possible while making reasonable monthly payments.
Once your payment plan is arranged, you must submit it to a bankruptcy court for approval. If the bankruptcy court approves the plan, your creditors cannot take your assets, provided you make your payments and keep any assets under the plan insured.
A bankruptcy trustee is appointed to manage your Chapter 13 payment plan. Your payments are made to the trustee who distributed them to your creditors.
What if I cannot make a payment?
Life is unexpected. Many times, our lives do not stay the same for several years at a time. A change in circumstances could cause you to become unable to make your monthly payments.
The worst thing you can do if you cannot make your monthly payments is nothing. Talk with your trustee. Sometimes the court will agree to lower your monthly payments.
Otherwise, you may have the option of converting your bankruptcy to Chapter 7 or dismissing your Chapter 13.
You can typically make purchases after filing for bankruptcy, but you will need to get the court’s approval to purchase anything on credit while in your Chapter 13 bankruptcy. When your Chapter 13 payment plan is complete, you are free to make purchases on credit.
What are the downsides?
Any type of bankruptcy you file will likely affect your credit. It will also stay on your credit report for up to 10 years.
Despite these drawbacks, Chapter 13 bankruptcy could be the right choice if you want to potentially keep your home and other assets.
