There are benefits and drawbacks to both Chapter 13 and Chapter 7 bankruptcy. Chapter 7 is the faster option, but it can also involve the liquidation of your assets. Additionally, there are limits on how much income you can have if you want to file Chapter 7 bankruptcy. It also remains on your credit report for a full decade after your discharge. Those drawbacks may turn some people away from considering Chapter 7.
Chapter 13 bankruptcy does not have income limitations or the requirement to liquidate your assets. Also called a wage earner's plan, Chapter 13 bankruptcy allows you to negotiate a structured repayment of your debts that is more sustainable and fair than what you currently have. It is a great way to discharge unsecured debts while protecting your assets and income.
When determining if Chapter 13 is the right option for you, you should consider the repayment plan you will likely need to complete. There are many considerations, including how long you will need to make structured payments to the courts.
Expect to make payments to the court for several years
In a Chapter 13 bankruptcy, the courts will look at your debts and your income and then determine the level of monthly payments that would be reasonable in your situation. They can help you negotiate with your creditors to lower payments. While you adhere to the plan, they can not take additional collection action against you.
Once you enter the repayment plan, you will send a single payment to the court every month. They will then distribute that amount to your individual creditors. In the vast majority of repayment plans, you must make 36 monthly payments for a total length of three years.
In other situations, five years or 60 months may be the expectation. You must make all payments as ordered to qualify for discharge at the end of Chapter 13. However, after completing all of those payments successfully, you will no longer have to worry about your unsecured debt.
Chapter 13 bankruptcy will stay on your credit report for seven years
Although Chapter 13 bankruptcy takes longer than Chapter 7, it will impact your credit score for about the same amount of time. Your bankruptcy will show up on your credit report for seven years from the date of your final discharge, which is three years fewer than the reporting period for Chapter 7 bankruptcy. In other words, the entire duration of the credit impact is roughly the same.
Chapter 13 bankruptcy can be complicated and involve negotiations to ensure a fair repayment plan. Partnering with an attorney who has negotiated Chapter 13 proceedings in the past is often a good option for those who need the protection of bankruptcy but who have steady income or sizable assets.