Chapter 13 bankruptcy can help you get rid of debt, but it has its downside too. So, is it worth filing for Chapter 13 bankruptcy? As a company that interacts with debtors daily and helps them explore other debt-relief options, we often get asked whether Chapter 13 bankruptcy is worth it. You can determine whether it is worthy or not by the end of this article. After you read through the four ways, you can determine if it is worth it. We will cover the following:
- An overview of Chapter 13 bankruptcy- this will help you understand how the plan works to avoid committing to a long-term plan you know nothing about
- How much will it cost to file for Chapter 13 bankruptcy- the best debt relief option is one you can afford. So, understanding how much filing will cost can help determine if it is worth it for you
- Advantages and disadvantages of filing
- Other suitable alternatives
1) A Brief Overview of Chapter 13, Bankruptcy
If you are experiencing financial hardship and are sinking deeper into debt by the day, you might consider filing for bankruptcy or seeking other debt-relief options like debt management. While Chapter 7 bankruptcy is more affordable and takes a short time, you may lose your assets to liquidation.
Whether you keep an asset depends on your state's equity and bankruptcy exemptions. Additionally, you must pass the Means Test to be eligible to file for Chapter 7 bankruptcy. If you qualify, you can file for Chapter 7 bankruptcy. If not, you can file for Chapter 13 bankruptcy.
Chapter 13, popularly referred to as "wage earners plan," is a type of payment plan-based type of bankruptcy. In Chapter 13 bankruptcy, a debtor develops [s an affordable plan which they can follow for a maximum of 60 months to repay a portion of their debt. The debtor can propose a three to five-year plan, including how they will repay their debt in installments. While in the plan, creditors cannot proceed with debt collection efforts.
2) The Cost of Filing Chapter 13 Bankruptcy
Although you are filing for bankruptcy because you cannot keep up with your debts, there are costs associated with the filing. Fortunately, these costs can be included in your payment plan.
How much you pay in bankruptcy will depend on personal factors. We built a Chapter 13 plan payment calculator to help you estimate how much your payment may be while in Chapter 13. We built our calculator following the official US Bankruptcy forms- From B 122C-2.
Trustee Fees
The bankruptcy court will appoint a trustee to oversee the administration of your bankruptcy case. You will pay a trustee fee by including the fee in your plan payment. Here are the updated Schedules of Actual Administrative Expenses of Administering a Chapter 13 plan. The trustee fees are categorized by the district. So, search your state and district to see the charges. Usually, Chapter 13 trustees are fewer than Chapter 7 trustees.
Attorney Fees
You can reduce your expenses by foiling Chapter 13 bankruptcy without an attorney. However, Chapter 13 is complex, and seeking the services of an attorney can help you file your case successfully and see your case to completion. Since Chapter 13 is more complicated than Chapter 7 bankruptcy, an attorney needs to do a lot; thus, they will charge higher fees than Chapter 7 attorneys. Use Pacer, a government website, with detailed information on bankruptcy, including bankruptcy fees. Most attorneys choose to sum up the fees into one cost. It might cost between $3,500 to $5,000 to hire a Chapter 13 bankruptcy lawyer.
Administrative Fees
If your district allows a Chapter 13 trustee to charge a monitoring fee, you must pay it. In the Orlando division, the Chapter 13 trustee can allow a mentoring fee of around $35 per month for services needed after confirmation of your payment plan. The monitoring fee will depend on your district since some districts do not allow it.
Here is an example of a range for the administrative fees.
3) Advantages and Disadvantages of Filing Chapter 13 Bankruptcy
Advantages
There are numerous advantages you will enjoy if you file for Chapter 13 bankruptcy:
- Legal protection from creditors which prohibits them from continuing or taking any measures to collect their debt
- You can come down some secured debts, e.g., a car loan
- Freedom from paying taxes on your unpaid debts depending on your debts
- You protect your property against creditors as you can stop foreclosure and avoid repossession
- There is no qualification test so anyone can file
Disadvantages
There are some downsides to filing for Chapter 13 bankruptcy, such as:
- Damage to your credit score and your credit report will make it hard to qualify for credit after filing
- Sometimes the payment can be unaffordable
- Low payment flexibility
- Chapter 13 cases often have a low success rate
- It takes longer to get your debts discharged, three to five years
- Bankruptcy is considered a public record.
Note: Just because Chapter 13 bankruptcy cases have low to medium success rates does not mean your chances of completing your case are low. Read our article explaining Chapter 13, Dismissal Refund. You will understand why the success rate is low, the common reasons people don't complete their plans, and what to do.
4) Debt Relief Alternatives
There are three main alternatives to filing for bankruptcy.
Debt Management
It is a debt relief option where you negotiate with your creditor directly or hire a debt settlement company to negotiate on your behalf. The goal of the negotiation is to persuade your creditor to allow you to pay an amount lower than the original debt in lumps. Debt settlement had a previous reputation due to greedy and frailest debt settlement companies which took advantage of their consumers.
Although numerous debt settlement companies exist, these two-hare consumers are focused enough to help debtors get rid of debt. Debt settlement is best if you can barely meet your minimum monthly payment but have a high disposable income according to bankruptcy standards.
High disposable income can increase your payments under Chapter 13, making it expensive. In debt settlement, if the creditor agrees to settle, you can save considerably by paying less than you owe, getting you out of debt faster. Read the advantages and disadvantages of debt settlement here. Our calculator can help compare Chapter 13 bankruptcy to debt settlement to see which is best for you.
Debt Management
It is a debt relief option that works through credit counseling. There are credit counseling organizations that advise debtors on their debts. They are often non-profit organizations, although they charge a fee for their service. Debt management companies will work with your lender and persuade them to lower the interest rate on your loan, e.g., from 20% to 5%. Here is a comparison of debt management and debt settlement.
Debt Payoff Planning
This debt relief option includes lining up your debts and paying them off fast to reduce expenses. You devote as much as possible towards the debt to get rid of it quickly. It is best if you have various debts that are hard to keep up with and have the means to repay them. You can use a debt payoff planner to get rid of debts. Usually, you start by prioritizing debts with high-interest rates to save more,
Take Away
We have discussed the core areas of Chapter 13 bankruptcy, what it is, how it works, how much it costs, its advantages, disadvantages, and alternatives. Based on this formation, you can determine if fooling into bankruptcy is worth it. You can also use our Chapter 13 calculator to compare Chapter 13 to these alternatives to decide whether filing is worth it. Still not sure? Reach out to us about any questions you may have, and we will get back to you before the end of the day.