When your financial situation is difficult and you can see no way out of the spiraling debt, you may be considering bankruptcy. There are two common forms of personal bankruptcy: Chapter 7 and Chapter 13. Filing for Chapter 7 is means tested. In Wisconsin, you must not make more than $67,355 as a household (2019 statistics). Chapter 13 doesn’t have those restrictions, but it does have limitations on the amount of debt you have. To be eligible to file for Chapter 13 bankruptcy, you must have no more than $394,725 in consumer credit debt and you also can have no more than $1,184,200 in secured debts, which includes mortgages and car loans. This post outlines the pros and cons of Chapter 13 bankruptcy.
PRO – Protects Your Assets
Filing Chapter 13 causes all collection actions to stop, including home foreclosure. Chapter 13 bankruptcy preserves your secured assets, so you don’t have to worry about losing your home or car. Unlike Chapter 7 bankruptcy, which is also known as Liquidation Bankruptcy, Chapter 13 bankruptcy is also called Wage-Earner’s Bankruptcy. The objective is reorganization of debt rather than liquidation of assets.
PRO – Unsecured Debt
Unsecured debt includes credit card debt, medical bills, and other debts that don’t depend on collateral. Chapter 13 bankruptcy results in unsecured debt being discharged entirely or diminished significantly. If the debt is not completely eliminated, you will be paying off a small portion of what you owe over the course of three to five years.
PRO – Attorney Fees Become Part of Plan
Often, people delay filing for bankruptcy because they fear incurring additional debt through attorney fees. Yet expert guidance is necessary to navigate bankruptcy law. When you file for Chapter 13, your attorney fees can be included in the reorganization plan and paid over the three to five year time frame.
PRO – Other Debt Included in Reorganization
A professional bankruptcy attorney may be able to help you incorporate debts not usually available for reorganization. For instance, while domestic support obligations (DSO) like child support remain due and payable, past-due amounts can be worked into the reorganization plan and paid over three to five years. Likewise, if you owe back taxes, there are some situations where some amounts of tax debt can be incorporated into the reorganization plan too.
PRO – Second Mortgage as Unsecured Debt
If your home’s second mortgage is worth less than what you owe on your first mortgage, then you can motion the court to have your second mortgage become an unsecured debt. Upon completion of your debt repayment plan, your second mortgage may be reduced greatly or discharged. Again, this is a situation where the guidance of the experts at Burr Law can make the difference.
CON – Length of Reorganization Plan
As indicated above, the typical Chapter 13 reorganization plan lasts from three to five years. That’s a long time. Many debtors find it impossible to maintain, though they are contractually and legally obligated to do so. Again, seeking professional advice from attorneys dedicated to bankruptcy law makes a tremendous difference here. Crafting a reorganization plan that anticipates periodic extra expenses and realistically assesses your earning potential over the next five years makes the length of the reorganization workable.
CON – Credit Implications
Like all bankruptcies, Chapter 13 bankruptcy is part of the public record and remains on your record for 10 years. It will decrease your credit score by 100 to 200 points. While Chapter 13 bankruptcy doesn’t immediately deprive you of all of your credit cards, it will affect your ability to acquire new ones, and sometimes how you are able to use the ones you already have.
Bankruptcy May Become An Option
The state and federal programs designed to diminish the negative economic impacts of COVID-19 have generally worked very well. In Wisconsin, there were 8,272 consumer bankruptcy filings (Chapter 7 and Chapter 13) from January through August 2020; that’s 28% fewer than through August of 2019, according to American Bankruptcy Institute data. However, almost all of those programs end December 31, and Wisconsin’s seasonal prohibition on utility cutoffs ends April 15. So if you’re barely making it now, you should consider whether you may need to declare bankruptcy in the spring.