Filing Chapter 13 bankruptcy is a decision that should be carefully weighed. It is smart to assess the advantages and disadvantages of this debt relief option because it can haunt you for years to come.
Filing Chapter 13 bankruptcy can be quite costly. In addition to repayment of restructured debts, debtors are responsible for court costs, administrative fees, and legal counsel. The cost to retain a bankruptcy lawyer has increased due to regulations set forth in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
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BAPCPA requires attorneys to verify clients stated debts and income and submit a letter of certification stating all claims are truthful. Therefore, law firms must engage in research to verify reported information. This requires additional time which equates to higher legal fees.
The new bankruptcy laws are complex and few debtors can comply with BAPCPA regulations without legal assistance. Those who attempt to file bankruptcy on their own run the risk of having their petition dismissed due to non-compliance.
In the past, petitioners often sought help using Chapter 7 liquidation bankruptcy. This chapter requires debtors to return property used as collateral to secure loans. Remaining balances are discharged and debtors are freed from debts.
Under BAPCPA, all debtors earning income equal to or greater than their states' median income levels are required to submit Chapter 13 petitions and establish a payment plan which must be approved by the court.
The process of filing chapter 13 bankruptcy begins once the petition is filed through local courts. Soon after, debtors must attend a 341 creditor meeting to discuss payment options with creditors. Once all parties arrive at an agreement they appear in court to present the payment plan to the judge.
Payments commence within 30 days after the court appearance regardless of whether the plan has been approved or not. Debtors can elect to pay the court directly or have Chapter 13 payments submitted through payroll deduction.
Payments are fixed amounts that must be remitted bi-monthly or monthly. Outstanding debts are prioritized into three categories - priority, secured, and unsecured. Priority claims can include past due taxes, alimony, child support, and student loans. Secured claims include loans secured with collateral such as real estate or automobile loans. Unsecured includes credit card debt and personal loans. Priority debts are always paid off first.
Chapter 13 payment plans last between 3 and 5 years. Debtors engaged in bankruptcy plans are not allowed to enter into new loans or obtain any type of credit without court authorization. Debtors often find it difficult to comply with payment plans if unexpected expenses arise. Sadly, nearly 75-percent of debtors fail out of bankruptcy.
Once debtors default on payment plans, creditors can request the petition be dismissed. If this occurs, debtors have no other debt relief options unless the judge allows them to convert into liquidation bankruptcy.
Both Chapter 13 and Chapter 7 cause substantial harm to debtors' FICO scores. Most people experience a decline of 100 points or more. Even those who do everything possible to improve credit ratings will find it takes at least 2 years to boost scores back to the level they were at when the petition was submitted. On average, it takes 5 years to achieve excellent credit after bankruptcy.
Debtors should investigate bankruptcy alternatives before submitting a petition. Several options exist that allow debtors to achieve the same results without the severe financial damage. Some of the more common alternatives include home equity loans, debt consolidation, and debt settlement.
Every alternative carries risks and rewards, so take time to become educated about each. Learning about debt relief solutions can help you decide if filing Chapter 13 bankruptcy is the best available option.
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