bankruptcy chapter 13

Things to Consider Before Filing Chapter 13 Bankruptcy

Filing Chapter 13 bankruptcy is a decision that can drastically alter your life. It’s smart to carefully assess the pros and cons and explore all debt relief options before filing a bankruptcy petition through the court.

It can also be a costly decision.

In addition to court filing costs and administrative fees, debtors must also retain a bankruptcy lawyer. Legal fees will vary by state and required workload. One word of advice, if you can’t afford court costs and legal fees, chances are bankruptcy isn’t the solution you need.

Perhaps the biggest disadvantage is complying with new bankruptcy laws enacted under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). BAPCPA forever changed the way debtors can obtain debt help and has made the process of filing bankruptcy costly, confusing, and complex.

First of all, BAPCPA requires debtors to establish Chapter 13 payment plans and reorganize their debt. Gone are the days when debtors can file Chapter 7 to abolish credit card debts and loans.

The level of debt to be repaid is determined by a financial tool known as the ‘means’ test. In essence, the means test calculates debtors’ income vs. states’ median income levels. When debtors’ income is higher than state levels they are required to enter into Chapter 13. Certain circumstances may allow debtors to obtain debt relief under Chapter 7, but these cases are evaluated by the court.

Before debtors can obtain bankruptcy confirmation they must first complete credit counseling through an agency approved by the U.S. Trustee. Any debt management plans arranged through credit counseling must be submitted to the court for approval.

Debtors attend a 341 creditor meeting to answer questions and establish their payment plan. Afterward, the debtor, attorney, creditors, and bankruptcy Trustee appear in court to present the Chapter 13 plan to the judge.

Debtors must begin making payments to the Trustee within 30 days after the court appearance; even if Chapter 13 payments have not yet been approved by the judge. Payments can be established through payroll deduction or paid directly to the court. The payment plan can be altered to add or delete creditors or payment amounts until the judge confirms the plan.

Chapter 13 payments are fixed amounts paid bi-weekly or monthly to the Trustee. Payments are distributed to priority claims first, secured claims second, and unsecured claims third. Priority claims encompass past due taxes, child support, and alimony, while secured claims include mortgage loans and loans secured with collateral.

Chapter 13 payment plans extend for 3 to 5 years. During this time debtors cannot obtain credit of any type without court approval. The financial constraints of bankruptcy plans often cause debtors to fail out of bankruptcy within the first year.

When debtors default on bankruptcy plans they lose court protection against creditors. In some cases, the courts will convert Chapter 13 to liquidation bankruptcy under Chapter 7. Otherwise, debtors will be at the mercy of creditors.

Long-term effects of personal bankruptcy include substantial damage to credit scores which can affect debtors on many levels. Nearly everything in life is based on credit scores.

Insurance companies base premiums on FICO scores, along with other factors. The amount of interest charged against bank loans and credit cards is based on FICO scores. Employers sometimes require credit checks before offering jobs. Most landlords require credit reports to determine if tenants present a potential risk for non-payment of rent.

Restoring good credit is a lengthy process. It is nearly impossible to improve FICO scores for at least one year after bankruptcy and often requires 5 to 7 years to achieve excellent status.

Bankruptcy alternatives exist that may provide equal or better debt relief options. Common alternatives include home equity loans, home equity line of credit, debt consolidation, and debt settlement. Each carries risks and offers advantages and disadvantages. Taking time to become educated about debt help solutions can help you determine if filing Chapter 13 bankruptcy is the best option.

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