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 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.

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.

Get a free, confidential bankruptcy evaluation. Learn More

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.

Get a free, confidential bankruptcy evaluation. Learn More
Negative Effects of Chapter 13 Bankruptcy for an Applicant


Related articles

What Are the Downsides to Filing Chapter 7 Bankruptcy?

Chapter 7 bankruptcy helps some debtors clear out old debts to start fresh, but it isn't a perfect solution to every person's debt problems. First, you have to meet certain income guidelines to file this type of bankruptcy case, and even if you do qualify, it may not be in your best interests to use Chapter 7.

Laws on Debt Forgiveness Through Chapter 13

When debt piles up, individual debtors may need the structure of a bankruptcy case to get back on their feet again. If you qualify, bankruptcy offers protection from collection efforts and a chance to partially erase some debts while paying others. An online legal services provider can help you file your bankruptcy case.

Rules for Declaring Bankruptcy in Kansas

When a Kansas resident wants a clean financial slate, he may file for bankruptcy protection under Chapter 7 or Chapter 13. Both are forms of individual bankruptcy structured under the federal Bankruptcy Code, but Kansas cases are subject to Kansas’ exemption list and median income level. If you successfully complete your bankruptcy case, you may receive a discharge of your remaining unpaid debts.

Related articles

Pros & Cons of Filing Bankruptcy

Individual debtors frequently file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code, and either ...

How to File Bankruptcy With Unsecured Debt

Many people who file for bankruptcy do so because they seek a financial clean slate and relief from a heavy debt ...

Legitimate Reasons for Bankruptcy

If you're experiencing financial hardship and considering filing for bankruptcy, you'll need to have a legitimate ...

How Does Bankruptcy Affect Homebuying?

Bankruptcy can give you a fresh financial start by allowing you to restructure or erase your debts under a ...

Browse by category
Ready to Begin? GET STARTED