Reorganizing your Debt with a Chapter 13 Bankruptcy Compared to a Chapter 7-“Fresh Start”


Mounting credit card debt and high interest rates are making it impossible to reduce our debt even when we consistently make our monthly payments. Many debtors feel like there is no relief available because they either don’t qualify for a “fresh start” or they don’t want to lose valuable assets filing a Chapter 7. However, relief is possible. By filing Chapter 13-Bankruptcy, individuals with steady income may keep all their property and get immediate relief from creditor’s collection efforts and wage garnishments.

The 2005 Bankruptcy Act sets forth the review criteria for bankruptcy. The Court looks at your average income from the prior six months and compares it to the median average income of people who live in your state. If your income is above the median average income, then the Court looks at how much you can afford to pay each month over a period of no more than five years. If you can afford to pay more than twenty-five percent of your unsecured debt than a Chapter 7 is probably not possible for you.

According to City-Data.com, the median income of Oak Park residents is on average above the State median income. Many of us go to work every day and probably should have a little discretionary income.  But months, and sometimes years, go by and we can’t get our debt under control. In fact, it’s getting worse because we’ve started missing payments and interest is compounding at rates we know we can never catch up with. Oak Park residents needing debt relief, who can’t qualify for Chapter 7 bankruptcy, might find filing Chapter 13 the best alternative.

Chapter 13 is reorganization of your debt rather than a liquidation of the debt.This means that when you file Chapter 13 your debts are not cancelled.  However, your debts can be reduced. Most importantly you will have a structured payment plan. The payment plan will include your total debt, attorney fees, and trustee fees. The payment plan may require you to pay some fees up front and some fees within the repayment time frame, which is a maximum of five years.  

Although your debt is not cancelled, filing Chapter 13 does stop interest from compounding. For example: Pre-filing, if you owe $30,000. Each month you make a payment. A good portion of that payment is applied toward interest. So, you might consistently make the minimum monthly payment but notice little impact on the principal of the debt.  After filing Chapter 13, the interest stops accruing. You receive a payment plan and the debt is fully discharged when you complete all your plan payments.

Filing bankruptcy is an important decision that you should only make after you have carefully considered your current situation. Prior to making this important decision, it’s important that you discuss your options with a licensed bankruptcy attorney.

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