Should I File for Chapter 13 Bankruptcy?

If your debt is piling up and you are being hounded by creditors, you may be considering personal bankruptcy.

There are three main types of bankruptcy, usually referred to by their chapter in the bankruptcy code. Two are best for individuals — Chapter 13 and Chapter 7. Chapter 11 bankruptcy is mainly for businesses. Chapter 7 bankruptcy involves liquidating your assets to pay back your loans. For those who qualify, can be a relatively simple and quick process.

With Chapter 13 bankruptcy, the court oversees restructuring your debts so you can pay them off in monthly payments over a period of three to five years. You aren’t required to sell your assets to pay your debts.

Certain eligibility requirements apply. If you have less than $383,175 in unsecured debt or $1,149,525 in secured debt and can continue paying your living expenses, but not your debt payments, Chapter 13 bankruptcy is a personal bankruptcy option available to you.

The court takes into account the amount of money you need for living expenses, such as mortgage payments, food, insurance and utilities. You are able to keep your real estate and personal property.

When you file Chapter 13 bankruptcy, the court uses a specific means test to crunch the numbers on your debt and disposable income and come up with reduced monthly payments. A trustee is appointed as a contact person and can challenge the plan in court.

After the bankruptcy court confirms the Chapter 13 bankruptcy plan, the trustee becomes the middle person between you and the creditors. You make payments to the trustee, who in turn makes payments to the creditors based on the bankruptcy plan.

Typically, at the end of three to five years, your remaining debt is forgiven as long as you fulfilled the terms of the plan. If you miss any of the plan’s payments, however, your case is dismissed by the court.

The process includes taking a financial counseling course, which is required before the finalization of the bankruptcy. During length of the bankruptcy plan, if you want to borrow additional money, say for a car, the court must approve the additional debt.

Chapter 13 bankruptcy will affect your credit by remaining part of your credit report for up to 10 years. You can rebuild your credit, but expect lower credit limits and higher interest rates. One note: mortgage lenders prefer Chapter 13 bankruptcy on your record over Chapter 7 bankruptcy.

Bankruptcy of the Chapter 13 persuasion involves more attorney time, so the cost starts around $2,000 with an additional court fee of $300. If Chapter 13 bankruptcy is your best bankruptcy option, consult with an attorney to start the process.

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