Chapter 13 Bankruptcy
Some debtors prefer Chapter 13 bankruptcy over a Chapter 7 bankruptcy because it helps them keep their property even if there are records of missed payments. In general, Chapter 13 bankruptcy reorganizes your debt while Chapter 7 is a full liquidation. In a Chapter 13 bankruptcy, the petitioner drafts a repayment plan that, when approved, essentially allows him to pay back his debt at a significantly reduced cost and over an extended period of time. The interest rate and payment period will be set by the bankruptcy court. To be eligible for Chapter 13, you must have a stable source of disposable income you can use to cover the terms of your proposed repayment plan.
Should I File a Chapter 13 Bankruptcy?
If you are in the any of the following scenarios, it may be a good idea to file for bankruptcy under this chapter:
- Facing the possibility of house foreclosure
- Missed several payments for your car and mortgage and want to make up for it
- Intends to pay back taxes to stop accruing interests
- Facing financial troubles but wants to keep your non-exempt possessions
Your bankruptcy attorney will help you negotiate for a reasonable payment plan based on your capacity to pay to make sure that the monthly payment demands are feasible. The good news is that if you are able to stick to the terms of the approved plan, your remaining debt can be discharged once the payment period ends. A discharge means that you are no longer obligated to pay back those loans.
What Happens to Secured Debts in Chapter 13?
When you file for a Chapter 13 bankruptcy, the automatic stay prevents the collection of collaterals in secured debt. A secured debt is usually tied to a tangible or concrete item, such as a house or a motor vehicle. There is less risk on the part of the creditors since the asset will serve as collateral should a borrower fail to pay up. A good example of this is mortgage: the creditor puts a lien on the house until the debt is paid in full. If the debtor defaults on a loan, the bank is legally permitted to seize the property and sell it as a compensation for its losses.
What Happens to Unsecured Debts in Chapter 13?
As soon as you file for Chapter 13 bankruptcy, you will be able to put an end to all forms of collection activities regarding any unsecured debt. Unsecured debts do not provide any form of security for lenders. This means that should the borrower default on a loan or misses any payments, the only legal action the lender can do is to sue you to collect what is owed. Unsecured loans often have higher interest rates. Examples of these are credit cards or medical bills.
What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
One key difference is that in a Chapter 13 bankruptcy, your debts are reduced while in Chapter 7, they are canceled. In terms of the filing period, you can only file a Chapter 7 bankruptcy every eight years. Another difference is that in a Chapter7 bankruptcy, any cosigners or guarantors would not receive the same bankruptcy protection you have, which means that your creditors can still go after them. In contrast, Chapter 13 can provide immunity from creditors if your repayment plan includes payment for any cosigned or guaranteed debt.
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