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Top Reasons To Avoid Chapter 13 Bankruptcy

Todays Date: December 19, 2018

When you first read about the provisions of Chapter 13 bankruptcies, it seems like an attractive debt management option. However, one of the top reasons to avoid Chapter 13 is that it sets unrealistic goals for the debtor. First, you need to understand what chapter 13 is.

If you have an asset that you would rather not lose through bankruptcy, such as a mortgaged home, your lawyer may advise you to file for Chapter 13. Debtors who have accumulated back taxes or assets with lower value than liens are also encouraged to file Chapter 13. You do not have to repay the entire loan amount, provided you can convince the court of your inability to repay the debt in full.

With the retention of non-exempt assets being such a big benefit, Chapter 13 appears to be a great alternative to Chapter 7 bankruptcy or to having to repay the full amount owed. Since debtors can file Chapter 13 every four years, it seems like a short-term commitment. However, the Chapter 13 repayment plan normally lasts for as long as three to five years, during which time debtors repay their debt based on an agreed upon schedule. At the end of this plan, the creditors write off the balance provided the debtor maintained his end of the bargain. Sounds like a great debt management solution. But it often is not.

One of the top reasons to avoid Chapter 13 is that debtors must meet certain eligibility requirements. This begins with having a steady income, which excludes people who might really benefit but who are currently unemployed and having trouble making ends meet. Often, people with this type of debt problem had arrived there as a result of the lack of income. The irony is that most debtors with a steady income would have repaid the debt in full. More interesting is that the Chapter 13 means test requires that a debtor’s income exceed certain thresholds in order to be eligible for this option. Go figure.

Another one of the top reasons to avoid Chapter 13 is that it requires adherence to the court’s approved plan. Although surrendering to such demands might seem like a small trade-off for the amount of debt that gets cleared, many debtors feel just as trapped as they would with a traditional budget. Not only that, but Chapter 13 is considered a public record, meaning that unlike a traditional do-it-yourself budget plan, anyone can look into the debtor’s financial affairs. In fact, the courts can even order changes if the debtor’s circumstances improve.

To clear the loan from your income you will need to forfeit any unexpected profits that come your way during the time chapter 13 is in force. Suppose you are gifted or willed a new car or make unexpected profits from a side business, the asset might be forfeited toward payment of your loan. Top reasons to avoid chapter 13 also includes the fact that your spouse may also be asked to provide detailed reports of their assets, income, and expenses, even if you don’t file for bankruptcy jointly.

Prior to filing Chapter 13 bankruptcy, debtors would be best served by creating their own, profession budget and repayment plan, especially if they have the means to do so. This not only enables the debtor to keep his financial circumstances out of the public domain but will actually improve his credit rather than ruin it.

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