Although a Chapter 13 bankruptcy offers some positive outcomes, including uncomplicated repayment plans and the eventual release of liability for certain types of debt, declaring bankruptcy can be a life-changing event. Understanding the advantages and disadvantages of filing for a Chapter 13 bankruptcy could help you make a well-informed decision before proceeding.
Chapter 13 Basics
Chapter 13, also referred to as an individual debt adjustment, provides a bankruptcy option for individuals who do not qualify for Chapter 7. It permits the bankruptcy filer to make monthly payments to a trustee who distributes the funds to the filer's creditors; this differs from Chapter 7, under which the filer may obtain a discharge of debts without paying creditors. Typically, Chapter 13 repayment plans last between three to five years. The filer receives a discharge and a release of liability for any debts included in the plan upon repayment completion.
Credit scores range from 300 to 800 and filing for a Chapter 13 bankruptcy is likely to drop your score by 160 to 220 points. These scores, based on a number of factors including your total debts and payment history, indicate your risk potential to lenders. Your occupation and length of time employed may also factor into your credit score. Moreover, a bankruptcy stays on your credit report for seven to 10 years.
Some employers, such as financial institutions, ask applicants whether they have ever declared bankruptcy, particularly if a position requires money-handling or fiduciary responsibilities. A potential employer may view a past bankruptcy as a red flag indicating irresponsibility. By law, an employer cannot discriminate against you simply because you filed Chapter 13. If a potential employer invites you to an interview and indicates she plans to run a background check, be honest, explain your particular situation and let her know you take your financial obligations seriously.
After filing Chapter 13, it may be possible to obtain a credit card; however, lenders will likely view you as a risk and charge you higher interest rates. According to SmartMoney magazine, if you are diligent about making monthly payments in a timely manner, you may be able to increase your credit score within a relatively short period of time. It also may be difficult to obtain a mortgage or rent an apartment without a creditworthy co-signer while the bankruptcy appears on your credit report.