Disadvantages to Filing Chapter 13 Bankruptcy

By Heather Frances J.D.

Chapter 13 bankruptcy gives a debtor the opportunity to get back on his feet when the debt load becomes too much to handle. However, Chapter 13 bankruptcy proceedings carry potential disadvantages, such as negatively impacting the debtor's creditworthiness, so a debtor may choose to file another type of bankruptcy case or attempt to avoid bankruptcy altogether.

Chapter 13 bankruptcy gives a debtor the opportunity to get back on his feet when the debt load becomes too much to handle. However, Chapter 13 bankruptcy proceedings carry potential disadvantages, such as negatively impacting the debtor's creditworthiness, so a debtor may choose to file another type of bankruptcy case or attempt to avoid bankruptcy altogether.

Chapter 13 Overview

Chapter 13 bankruptcy allows a debtor with a regular income to repay debts over three to five years under a court-approved repayment plan. The plan may provide for repayment of all or a portion of the debt and is administered by a bankruptcy trustee. The debtor makes regular payments to the trustee who then distributes the money among the debtor’s creditors. Filing Chapter 13 also affords the debtor an automatic stay against collection proceedings, including foreclosure.

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Partial Discharge

Unlike Chapter 7 bankruptcy proceedings, Chapter 13 bankruptcy doesn’t provide a total discharge of debt. After the repayment plan is successfully completed, the Chapter 13 debtor receives a discharge from the court as long as he has completed the mandatory financial management course; has not received a discharge in a prior case within a certain time frame; and the debtor’s domestic support obligations are paid. Even when the debtor receives a discharge, it applies only to the debts provided for in the bankruptcy repayment plan or those that have been disallowed. Certain debts are not discharged, including mortgages, child support, taxes and student loans, though collection actions on these debts are stayed during the repayment plan period.

Credit Score

Filing a Chapter 13 bankruptcy case negatively affects your credit score. While each lender treats bankruptcy differently, most individuals who file for bankruptcy will see a drop of 160 to 220 points in their credit score, according to the Electronic Privacy Information Center. Chapter 13 bankruptcy remains on a filer's credit report for 7 years from the date of filing, so your ability to rent housing, obtain a mortgage, buy a car, or engage in other activities that require a credit check may be impacted.

Future Employment

Bankruptcy may also negatively impact your opportunities for employment. Many employers run credit checks on job applicants, particularly when a position involves fiduciary responsibilities; however, employers must obtain your permission before doing so. Furthermore, employers are required to tell you if you don't get a job because of negative information on your credit report and show you a copy of the report.

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Pros & Cons of Filing Bankruptcy

References

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Adverse Effects of Bankruptcy

Bankruptcy is among the most effective options for getting out of debt, but bankruptcy comes with a number of adverse effects that should be considered before filing. Anyone thinking about filing for bankruptcy should carefully weigh the benefits of eliminating debts through the bankruptcy process against the adverse effects of doing so.

Alabama Bankruptcy & Foreclosure Laws

Homeowners who can’t make their mortgage payment may eventually face foreclosure, but bankruptcy may help you get back on your feet financially. Bankruptcy can halt your foreclosure proceedings and give you an opportunity to save your home. If you have already been through foreclosure, bankruptcy may erase your remaining debts from the foreclosure proceedings.

Reasons to File Chapter 13

Filing a Chapter 13 bankruptcy petition enables a debtor to pay back debts over a three-to-five year period, through a court appointed trustee. Unlike other forms of bankruptcy, the debtor does not risk losing his home or car through liquidation as long as his monthly payments are current. After successful completion of the Chapter 13 plan, all unsecured debts, such as credit card debt, listed at the time of the bankruptcy filing, are discharged and the debtor's secured debts, such as a car loan or mortgage, are returned to good standing.

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