Filing Chapter 13 Bankruptcy
Filing Chapter 13 bankruptcy is an important decision. While it is true debtors can obtain debt relief through personal bankruptcy, the process is costly and often leads to additional financial stress.
Filing Chapter 13 bankruptcy is a complex process which requires debtors to hire a bankruptcy lawyer to ensure compliance with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Stipulations of BAPCPA require all debtors to obtain credit counseling and establish Chapter 13 payments plan. Bankruptcy courts determine the amount of debt to be repaid by using a financial tool known as the 'means' test.
Chapter 13 payment plans typically last for 1 to 3 years. During the repayment phase, debtors contribute upwards of 60-percent of their disposable income; making compliance difficult. Sadly, most bankruptcy plans fail within the first 12 months, leaving debtors at the mercy of creditors and with no protection from the court.
Homeowners facing foreclosure often file chapter 13 bankruptcy to stop foreclosure proceedings. This can be a reasonable solution as long as debtors can comply with Chapter 13 payments and remain current with future loan installments. If debtors later fail out of bankruptcy their mortgage lender can proceed with foreclosure action; leaving them with no other home saving options.
Bankruptcy can cause long-term financial problems because this blemish remains on credit reports for up to 10 years. Debtors often incur a reduction of up to 100 points off their credit score. This places debtors into a lower credit classification which often prohibits them from obtaining credit for several years.
When debtors with bad credit ratings are able to obtain credit they almost always pay substantially higher interest rates and have reduced credit limits. It can take several years to restore a good credit rating.
Personal bankruptcy can also be disruptive for individuals who need to rent living quarters. Most landlords are leery of renting to individuals who have recently filed bankruptcy. Landlords normally require higher security deposits and request first and last months' rent. This can be financially restrictive for debtors who are engaged in Chapter 13 payment plans.
Bankruptcy can limit employment opportunities as well. Employers often have the mindset that if employees are having personal finance problems they may not make good employees. Unfortunately, some people experiencing financial problems can become desperate enough to steal from their employer. This places employers at financial risk and they will generally select applicants who have good credit ratings even if bad credit applicants have better skill-sets.
Last, but not least, filing chapter 13 bankruptcy can cause debtors to witness an increase in insurance premiums. Many insurance providers base premiums on credit scores, along with other factors such as driving records or number of claims filed within the previous 5 years.
Before filing chapter 13 bankruptcy, debtors should carefully weigh the pros and cons of this decision. There are bankruptcy alternatives that may provide the same results without the long-term effects. Some of the more common remedies include home equity loans and debt consolidation.
We encourage you to browse our bankruptcy article library to review bankruptcy alternatives and learn more about the new bankruptcy laws. When in doubt, it's best to consult with a lawyer before filing chapter 13 bankruptcy.