Understanding Chapter 13 Bankruptcy

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Making the decision to file for Chapter 13 Bankruptcy can be difficult, but it may end up being one of the best decisions you ever made. This process, which is governed by the 13th chapter of the United States Bankruptcy Code, is designed specifically for debtors who have the means to pay back their debts, but need a little extra time to do so. Generally speaking, Chapter 13 bankruptcy is for individuals and families, but can also be used by business owners under specific circumstances.

What Does Chapter 13 Bankruptcy Do?

understanding Chapter 13 BankruptcyIn short, Chapter 13 bankruptcy offers you an opportunity to get back on your feet financially without losing the bulk of your possessions. Instead of “forgiving” or discharging your debts as Chapter 7 bankruptcy does, filing for Chapter 13 bankruptcy essentially allows you to reorganize most of your existing debt in a way that will allow you extra time to pay it off. It is a process that has been used by many different types of people who found themselves in need of a financial fresh start. Declaring bankruptcy often has a negative reputation, but if you find yourself in a difficult financial situation it can actually be a major step in solving your troubles.

While Chapter 13 bankruptcy can help you make your debt more manageable, but it will not eliminate all debts. Some of the debts that cannot be discharged through bankruptcy include: child support payments, alimony payments, student loans, and unpaid taxes.

How Does Chapter 13 Bankruptcy Work?

If you file for Chapter 13 bankruptcy, you will need to gather pertinent information regarding your financial situation. If you are married — even if your spouse is not filing for bankruptcy — you will need to gather information about their situation as well. The information you will need includes:

  • A list of all your creditors, how much you owe them, and the nature of their claims;
  • The source(s), amount, and frequency of your income;
  • A list of all of your property;
  • Any money that is owed to you; and
  • A detailed list of your monthly living expenses like housing, utilities, food, taxes, transportation, medicine, clothing, etc.

All of this information will be used to create a detailed repayment plan that will allow you retain possession of your belonging while making payments on your debt using your disposable income over the next three to five years. Disposable income is what is left over after the cost of your living necessities have been taken care of. Once you have filed for bankruptcy, an automatic stay is placed on your debtors, which should stop any aggressive collection techniques that have been in use. Also, it’s important to know that once you have successfully completed your repayment plan, your individual creditors cannot generally obligate you to pay them in full. And as long as you make your arranged payments, you may be able to keep everything you own.

Does Chapter 13 Bankruptcy Hurt Your Credit?

Understanding Chapter 13 BankruptcyLike any bankruptcy filing, declaring bankruptcy under Chapter 13 will have a dramatic, negative effect on your credit score, and can stay on your credit for up to ten years. What you need to realize, though, is that unpaid debts, late payments, missed payments, defaults, repossessions, and lawsuits will also have a negative effect and will generally be harder to explain and/or overcome when you apply for credit in the future.

In order to start rebuilding your credit, you will want to carefully seek out new lines of credit as early as possible. However, you will want to make sure that any new credit can be paid for in a timely fashion so that you don’t end up in the same difficult situation as before. There are banks and other lending institutions that will lend money to “bad risk” borrowers, but you will typically be paying higher interest rates than you were before you declared bankruptcy.

Chapter 13 bankruptcy is a complicated process, and you would do well to retain the services of an experienced bankruptcy attorney if you think it is the right move for you. They can help you navigate the bankruptcy process successfully so that you can get back on your feet and look forward to the future with hope instead of frustration and dread.