What is a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy is a government-sponsored repayment program in which all debt is deposited into the bankruptcy. Monthly payments are then made to a Chapter 13 trustee for 36-60 months. Any eligible debts left over at the end of the bankruptcy will be discharged once the plan concludes.
In comparison, debt relief programs aim to negotiate with creditors to lower outstanding balances, reduce interest rates, or create more manageable repayment plans.
These two programs seem quite similar, so why would someone choose one over the other?
Protection:
When you file bankruptcy, the court places an automatic stay, which means creditors are stopped from harassing you, demanding payments, or suing you. Creditors are also not allowed to report missed debt payments to the credit bureaus while Chapter 13 is in progress.
In debt relief programs, there is no automatic stay. Creditors are free to keep demanding payments, and many will notice a sharp decline in their credit scores due to missed payment reports. There is also no promise that these debts will actually be discharged or paid off. Often, while you are paying into a debt relief program, the creditors aren’t seeing that money immediately and will continue charging you interest and damaging your credit score.
Affordability:
Chapter 13 payments are based purely on affordability. We don’t care how much you owe; we care how much you can pay monthly. To calculate the monthly payments, we, as your attorneys, look at your income as a household and take into account nearly all of your expenses (food, insurance, rent/mortgage, car payments, pet expenses, etc.) and whatever is left over in disposable income is how much you pay.
Debt relief is based more on negotiating with creditors, not how much you can afford. Creditors state how much they will accept a month based on your debts. If you can’t afford it? That’s tough luck.
Flexibility:
Life changes, things happen, and we must be able to move and adapt. Chapter 13s are very flexible vehicles for debt repayment and can flex and fold when life throws you for a loop. The goal of Chapter 13 is always to remain affordable so we can modify and adjust if need be.
Debt relief leaves you at the whims of the creditors. Some are willing to work with people to lower the monthly payments, but others aren’t. So, if life happens, you may be stuck with a payment you can’t afford!
When the time is right, or when you are ready to get your life back, reach out to Minnesota’s most kind and helpful bankruptcy law firm by going now to www.lifebacklaw.com.