Learning About Chapter 13 Bankruptcy

When consumers think about filing for bankruptcy, most are likely thinking about a Chapter 7 bankruptcy in which debts are completely wiped out.  However, according to a recent article in Personal Finance, it’s important to consider if Chapter 13 bankruptcy might be the best option for you.
What is Chapter 13 Bankruptcy and How Does it Work?
Chapter 13 bankruptcy, unlike Chapter 7, results in debt reorganization or restructuring, rather than liquidation.  In other words, when consumers file for Chapter 7 bankruptcy, they benefit from an automatic stay that prevents creditors or collection agencies from calling to collect a debt.  In Chapter 7 cases, the bankruptcy trustee liquidates the debtor’s assets, pays back (as much as possible) the creditors, and gives the debtor a clean start.
But if you’re experiencing anxiety over massive debts and have concerns about keeping most of your secured property (like a home or a motor vehicle), Chapter 13 may be the better option for you.  In particular, if you want to stay in your home, a Chapter 13 bankruptcy may allow you to keep more than the $30,000 of equity permitted by the Illinois homestead exemption.  In other words, a debtor who files for Chapter 7 bankruptcy can only exempt up to $30,000 of equity in his or her home, but a debtor who files for Chapter 13 bankruptcy may be able to get current on a mortgage loan.
What is debt reorganization? Essentially, it’s a repayment plan whereby individuals come up with a plan that will enable them to pay back as much debt as possible in 3-5 years.  After making those regular payments, certain remaining portions of the debt can be discharged.  You’ll be required by the bankruptcy court to demonstrate your financial ability to stick to the plan, and then you’ll make a monthly payment that will go toward repaying your creditors.  In order to be eligible, you’ll need to have a regular source of income and be able to prove to the court that you can stick to your repayment plan.
Pros and Cons of Chapter 13 Bankruptcy
What are some of the pros of filing for Chapter 13 bankruptcy instead of simply wiping out past debts with Chapter 7 bankruptcy?
·      You’ll likely be able to keep your house.  While losing your home won’t necessarily happen when you file for Chapter 7 bankruptcy, if you exceed the $30,000 Illinois homestead exemption, Chapter 13 may be a better option;
·      You’ll protect your co-signers, for unlike in a Chapter 7 bankruptcy filing, your co-signer won’t be left to contend with your debt (instead, you’ll work to pay it back through your repayment plan);
·      You’re not eligible for Chapter 7 because you’ve already filed in the past 8 years;
·      You’re not eligible for Chapter 7 because you fails the “means test,” or in other words, you can afford to pay back some of your debts.
While Chapter 13 bankruptcy can be a good option for certain debtors, it may not be a feasible option for many.  Indeed, only about one-third of all debtors who file for Chapter 13 bankruptcy end up completing their repayment plans.
Do you have questions about filing for consumer bankruptcy in the Chicago area?  Consumer bankruptcy laws are extremely complicated, and it’s important to discuss your situation with an experienced attorney.  Contact a dedicated Oak Park bankruptcy lawyer at the Emerson Law Firm today.
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