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.
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.
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.
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.
- United States Courts: Chapter 13: Individual Debt Adjustment
- United States Courts: Chapter 7: Liquidation Under the Bankruptcy Code
- MyFICO: Credit Q&A: How Will My FICO Score Consider a Bankruptcy?
- Electronic Privacy Information Center: Credit Scoring
- Privacy Rights Clearinghouse: Fact Sheet 16: Employment Background Checks
- Experian: Bankruptcy Remains on Your Credit Report for up to Ten Years
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