Chapter 13 Bankruptcy: What You Need to Know

Understand Chapter 13 bankruptcy cost, qualification, pros and cons, and alternatives to make the most informed decision.

You are researching whether to file bankruptcy, and may be realizing that the two main types of consumer bankruptcy are Chapter 7 and Chapter 13. 

The purpose of this article is to tell you the important things about Chapter 13 bankruptcy in simple turns.

The two components that are essential are:

  1. How Chapter 13 Bankruptcy Works
  2. How Much Chapter 13 Bankruptcy Costs
  3. How much your Chapter 13 Bankruptcy Payment Plan Is
  4. Chapter 13 Bankruptcy Pros and Cons
  5. Chapter 13 Bankruptcy Alternatives

Chapter 13 bankruptcy is known as the wage earners bankruptcy. It offers debt adjustments to those who have regular incomes. Many individuals consider Chapter 13 bankruptcy when they do not qualify or are at risk of losing their belongings in a Chapter 7 bankruptcy.

How Chapter 13 Bankruptcy Works

The goal of a Chapter 13 bankruptcy is a bankruptcy discharge, which essentially means a forgiveness of your debt.

An individual starts the Chapter 13 bankruptcy by filing a petition with the local bankruptcy court. You would need to provide your financial details, including your income, expenses, assets, and liabilities, and tax return transcripts.

In a Chapter 13 bankruptcy, you have to take 2 mandatory courses: A credit counseling and a debtor education course.

A Chapter 13 bankruptcy plan often lasts 3 or 5 years. You will have a monthly plan payment that you will be paying often through the Chapter 13 Bankruptcy Trustee, the administrator and overseer of the bankruptcy. To succeed, you also may want to consider reading tips and tricks to help you along thew ay.

You may know that not everyone qualifies for Chapter 7 bankruptcy, but does everyone qualify for a Chapter 13 bankruptcy? As long as you are under the debt limit, you should qualify for the Chapter 13 bankruptcy.

How Much Chapter 13 Bankruptcy Costs

You also have to pay a filing fee of $235 for the case filing and $75 for an administrative fee.

Due to the complexity of Chapter 13 bankruptcy, many people also hire a bankruptcy attorney for their Chapter 13 bankruptcy filing. Most Chapter 13 bankruptcy attorneys charge the same fee in the district in what’s referred to as the no look fee. The no look fee is the presumptively reasonable fee that a Chapter 13 bankruptcy attorney can charge the debtor through the plan.

The Chapter 13 Bankruptcy fee often costs between $2500 and $6000. The cost is often higher than a Chapter 7 bankruptcy because of the complexity and length of the case.

You will also be responsible for the Chapter 13 trustee administrative fee that can range depending on your district

Due to the high cost of the Chapter 13 bankruptcy attorney and trustee fee, many people wonder whether the Chapter 13 bankruptcy is a good idea.

Next, let’s cover just how much your Chapter 13 plan payment may be.

Estimating Your Chapter 13 Plan Payment

You will pay a monthly plan payment in a Chapter 13 plan. The calculation is based on detailed bankruptcy forms (see here and here). 

The Chapter 13 Payment Plan often consists of the following:

  1. Payment to bankruptcy attorney
  2. Payment to Chapter 13 trustee
  3. Payment to secured creditors
  4. Payment to other obligations
  5. Payment to unsecured creditors

You can get an estimate of your Chapter 13 plan payment by taking a Chapter 13 payment plan calculator online.

Chapter 13 Bankruptcy Pros and Cons

You may want to consider the pros and cons of Chapter 13 bankruptcy before filing. Let’s cover them one by one. 

Advantages:

  1. Many people see that protecting their home from foreclosure is an advantage of Chapter 13 bankruptcy. You get the guarantee of not losing your home from being auctioned off, and you can often catch up on payments in arrears in the payment plan.
  2. You can readjust your debt. In many Chapter 13 bankruptcy plans, you do not have to pay back 100% to your unsecured creditors. 
  3. You have a fixed duration of repayment. You often have a 3 or 5 year plan unless you are in a 100% Chapter 13 plan.
  4. You could have lower payments than your current monthly obligations. Your Chapter 13 plan payment may be considerably lower than what you are currently paying towards your debt
  5. Potentially a lower vehicle interest rate or balance on your car note.
  6. Protection against your creditors. This can be from collection calls and from unpaid debt lawsuits.
  7. Chapter 13 bankruptcy also consolidates debt into one single payment handled by the Chapter 13 trustee.

Disadvantages:

  1. Chapter 13 bankruptcy can negatively affect your credit report and credit score. For example, a Chapter 13 bankruptcy is on your credit report for 7 years. This can create a waiting period for purchasing a new home.
  2. The plan takes 3 or 5 years until you get discharged from debt, often much longer than Chapter 7 bankruptcy which can take 120 days.
  3. There may be implications on your Chapter 13 plan if you receive an increase in your salary or additional sums of money.
  4. Chapter 13 bankruptcy can be very expensive if you are in a 100% Chapter 13 bankruptcy plan because you are essentially paying back your creditors 100% in addition to bankruptcy attorney and Chapter 13 bankruptcy trustee fees.

Chapter 13 Bankruptcy Alternatives

You should also consider your Chapter 13 bankruptcy alternatives. You can check whether you qualify for Chapter 7 bankruptcy, but many individuals who are looking to file Chapter 13 bankruptcy make too much or have an asset above the bankruptcy exemption that prevents them from wanting to pursue that route.

Debt Settlement:

Debt settlement is one of the most common alternatives to Chapter 13 bankruptcy. The reason that many people compare debt settlement to Chapter 13 bankruptcy is as follows:

  1. Both Chapter 13 bankruptcy and debt settlement is payment plan solutions
  2. Debt settlement is often less expensive that debt management
  3. Debt settlement is often more flexible than Chapter 13 bankruptcy, making it sometimes more attractive to those who have variable incomes.
  4. Chapter 13 bankruptcy protects your from creditor lawsuits. Debt settlement does not protect you in that way.

Before doing debt settlement, you may want to consider the lawsuit likelihood of creditors and also the potential tax implications of forgiven debt. You may not be responsible for taxes if you are tax insolvent, but it’s important to understand these attributes.

You may also want to consider reading the FTC report on debt settlement.

Debt Management:

Debt management, also known as credit counseling, is another common alternative to Chapter 13 bankruptcy. In a debt management program, the company would attempt to negotiate the interest rate of the debt lower, making the monthly payments more affordable. 

Also, consider reading this report from the CFPB on debt settlement and credit counseling.

What Should You Do?

There is a high rate of Chapter 13 dismissals, so it is important to consider whether you can afford Chapter 13 bankruptcy, your estimated cost of Chapter 13 bankruptcy, the pros and cons and the alternatives.


Hopefully this article helped put complex Chapter 13 bankruptcy terms into simple understandable terms. Reach out to me directly at dave@chapter13bankruptcyhelp.com if you have any further questions.

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