The Pros & Cons of Filing a Chapter 13 Bankruptcy

The Pros and Cons of Filing a Chapter 13 Bankruptcy

Individual debtors (including those engaged in business) can file a Chapter 13 bankruptcy to restructure or reorganize debt. Here are some pros and cons to think about when deciding whether Chapter 13 bankruptcy is right for you.

Pros

• You are permitted to keep nonexempt property. A Chapter 13 allows you to keep property subject to a security interest and continue to make lower payments. A Chapter 13 permits you to keep property that you would probably lose in a Chapter 7 case.
  
  
• You can discharge unsecured debts after paying only cents on the dollar over the life of the Chapter 13 plan (usually three to five years). Even a 100 percent plan does not pay unsecured creditors in full, because in some instances you may not have to pay interest on the unsecured debt.
  
  
• Your creditors are not entitled to "vote" to accept or reject your Chapter 13 plan. A secured creditor can "object" to the plan, but you can "cram down" on the creditor and force it to accept the treatment that you propose in the plan if the court finds that your plan meets the requirements of the Bankruptcy Code.
  
  
• Many debts that are not dischargeable in a Chapter 7 are dischargeable in a Chapter 13. In a Chapter 13 case, all debts that are provided for in the plan are discharged upon completion of all payments under the plan, with only a few exceptions. The only debts excepted from discharge (not discharged) under Chapter 13 are: debts that were not listed on the debtor's bankruptcy schedules; debts for spousal maintenance, alimony and child support; student loans; criminal fines and restitution; and debts related to driving while intoxicated.

Cons

• You need to meet the financial means requirements.
  
  
• You must devote all of your disposable income to payments under the plan for at least three years.
  
  
• The Chapter 13 Trustee charges you a fee to administer the case. The fee can be up to 10 percent of your payments under the plan.
  
  
• If you fail to make your payments under the plan, the Chapter 13 Trustee will move to dismiss the case. If the trustee is successful, you will not receive a discharge of your debts. Thus, for example, if you have made thirty of thirty-six payments under the plan and fail to make the last six payments, your case will be dismissed and you will not receive a discharge.
  
  
• You must have regular income, and owe set amounts of unsecured and secured debts, to qualify to file under Chapter 13.
  
  
• If you should find yourself in even worse financial straits afterward, you may not be able to avail yourself of liquidation in bankruptcy until eight years have passed. After a discharge under Chapter 7, there is an eight-year waiting period before a consumer can file for bankruptcy again. There is either a two-year or a four-year wait for a Chapter 13 filing, depending on the circumstances.

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