The Procedure
To qualify for Chapter 13, two requirements must generally be met. First, you must be an individual or married couple with a consistent income. This essentially means you cannot declare bankruptcy for business or foreign debts. You must also file bankruptcy for the following types of debts: (a) unsecured debts cannot exceed $360,475 and (b) secured debts cannot surpass $1,081,400.
The objective of Chapter 13 is debt reorganization through a repayment plan; therefore, you have filed the incorrect case if you seek complete debt elimination without payment. Prior to developing a Chapter 13 debt repayment plan, you must provide the court with a comprehensive list of your creditors. These creditors are prioritized in terms of the amount and timing of repayment under the plan. In determining your ability to maintain the repayment plan, the court will also consider your income and assets.
Once the court has established and approved the plan, your creditors will be notified of its specifics. Your creditors must adhere to this payment plan and are legally prohibited from pursuing debt collection outside of its parameters. Your creditors will be paid according to the following order of priority: (1) priority claims, such as taxes and child support, (2) secured claims, such as mortgages or auto loans, and (3) unsecured claims, such as credit cards, medical expenses, and other unsecured debts.
The Rewards
The Chapter 13 benefits are twofold. First, because you are repaying your debts rather than having them written off, your credit will be better protected from harm. Your prospects of obtaining future credit lines will improve, as potential lenders view debt repayment more favorably than debt elimination. Second, creditors are less likely to confiscate and liquidate your property. This is particularly true for secured obligations such as mortgages and auto loans. To retain ownership of such items, the majority of bankruptcy courts will require debt repayment through a Chapter 13 case. These assets are at greater risk during a Chapter 7 bankruptcy filing.
The Negatives
The repayment of debt is really the only disadvantage of a Chapter 13 bankruptcy filing. Some people believe that the obligation to repay their debts is more burdensome than obtaining debt relief through Chapter 7. If you cannot afford to repay your debts, there is a good chance that you still qualify for Chapter 7 and would not be compelled into a debt repayment plan that would cause additional financial hardship.
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