Chapter 13 Bankruptcy and Whether or Not You Should File

Seal of the United States bankruptcy court. Ch...

Seal of the United States bankruptcy court. Church of Scientology attorney Steven Hayes bought rights to the Cult Awareness Network assets during its bankruptcy proceedings. (Photo credit: Wikipedia)

A Chapter 13 bankruptcy, commonly called the Wage Earners Plan, is for working people whose median income is above the median income for their state and who cannot pass a Means Test. There are a lot of good and bad reasons for whether or not you should file a Chapter 13.

The Basic Reason a Debtor Should File a Chapter 13

Filing for bankruptcy protection is a Constitutional right belonging to every citizen in the United States. You can file for bankruptcy anytime by simply applying to your local District Bankruptcy Court and filing the appropriate papers along with the appropriate fees. Anyone can take this filing step whether they really need to file for bankruptcy protection or not.

Determining whether or not you should file a bankruptcy is a different matter. A good general rule of thumb in considering filing for bankruptcy protection is to determine whether or not you are truly bankrupt. If your current household income will not meet all of your current necessary living expenses and pay principal down after paying interest on all your outstanding debts over a five year period, it might be a good idea to consider looking at bankruptcy protection.

Good Reasons You Might File a Chapter 13 Bankruptcy

  • Filing any bankruptcy will stop bill collectors in their tracks. It is illegal for bill collectors to try to collect a bill once you file for bankruptcy protection. Trying to collect on debts includes trying to foreclose on your property, trying to repossess an asset, seeking judgments through court action, attaching your assets and property, wage garnishments, and basically any other collection activity. They must go through a bankruptcy court to collect once you have filed for protection.

  • Co-signers of debt will be protected under a Chapter 13 as long as you faithfully make your payments as described in your plan.

  • Certain secured liens can become unsecured and stripped once the plan is finished.

  • You make planned payments based on your disposable income and what you can afford to pay over 3 to 5 years. Once the payment time is completed, the remainder of eligible debts are discharged and forgiven.

  • In certain types of loans, interest and principal can be crammed down to the current value of the asset and paid on that basis.

  • You have the opportunity to reduce debts in a Chapter 13 that cannot be discharged in other types of bankruptcies.

  • You can keep all of your property in a Chapter 13 including those that are exempt and non-exempt. You must keep up payments on the plan to keep the non-exempt property.

  • A debtor can often extend the terms of a loan under an accepted payment plan during a Chapter 13.

Although there are some disadvantages for filing a Chapter 13 in lieu of other types of bankruptcies, the above reasons for filing one are certainly good reasons to consider before you file. A bankruptcy attorney that specializes in Chapter 13 bankruptcy might be a good source to research before you file.

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