Chapter 13 Bankruptcy Impact

What Happens if You File for Chapter 13?

Chapter 13 bankruptcy is a repayment plan. In most cases you will pay 10-20% of your unsecured debts including credit cards, medical bills, personal loans, gas cards, prior repossessions, prior foreclosures, etc. over a 3 to 5 year repayment plan. This is obviously much better than attempting to negotiate the debt with the creditors, since they will usually not accept the longer timeframe and they will continue to charge you interest.

Common Debts Bankruptcy May Wipe-Out

In addition, you will repay what you are behind in child support and alimony (arrearages) in your Chapter 13 bankruptcy while resuming payments on the current monthly amounts set by the family court.

You will also include any taxes owed to the IRS, state, county and city as of the date of your bankruptcy filing. They will be paid by the Trustee over the course of your bankruptcy. However, you must pay any taxes that become due after your bankruptcy is filed. Student loans are not dischargeable and are usually paid outside the bankruptcy.

Keeping Your House

Most people file a Chapter 13 bankruptcy because they are behind on a house or car payment. Regardless of the amount you are behind on your house payments or the amount of equity you have in your home and other assets, you are usually entitled to file a Chapter 13 bankruptcy as long as you have the ability and disposable income to make the monthly payments to the court plus your other debts. If you have more than $35,000 of equity, $70,000 if married and the home is deeded in both spouses’ names, you will be required to pay a larger percentage of your unsecured debts including credit cards, medical bills, gas cards, old repossessions, old foreclosures, etc. through your bankruptcy.

Keeping Your Car

Most people file a Chapter 13 bankruptcy because they are behind on a house or car payment. Regardless of the amount you are behind on your car payments or the amount of equity you have in your car or other assets, you are entitled to file a Chapter 13 bankruptcy as long as you have the ability and disposable income to make the monthly payments to the court plus your other expenses. If you have more than $3,500 of equity, you may be required to pay a larger percentage of your unsecured debts including credit cards, medical bills, gas cards, old repossessions, old foreclosures, etc. through your bankruptcy.

Keeping Your Business

In most cases you can keep your business. There are many factors when it comes to retaining a business, so it is best to seek legal advice specific to your situation.

Creditor Harassment

Once your bankruptcy is filed with the bankruptcy court, an automatic stay goes into effect stopping creditors from contacting you and proceeding with foreclosure, repossession and other legal actions including enforcement of a lien. Debts you incur after filing bankruptcy are not included in the automatic stay and those creditors have the right to contact you and take collection actions against you.

Medical Debt

Medical debt can be eliminated in bankruptcy. If you are married and the medical debt was incurred while you were married, both you and your spouse are responsible for the debt. As a result, if only one spouse files bankruptcy, the other non-filing spouse would still be responsible for the medical debt. It is also important to determine whether the medical provider has obtained a judgment lien against you. If they have obtained a judgment lien and you own a house, additional legal paperwork may need to be filed to void or eliminate the lien. It is important you discuss this with your attorney.

Credit Rating

It is important to differentiate between your credit score and your ability to obtain credit. Your credit score is the number the credit reporting agencies assign to your credit. It is based on your history of making payments on your debts. Your ability to obtain credit is based on your ability to make payments in the future and looks at your income and your debts. If your debts exceed your ability to make payments, you may be unable to obtain credit even if you have consistently paid your debts on a timely basis and have a good credit score. Filing bankruptcy will eliminate many of your debts and will improve your ability to obtain credit in the future. However, your credit scores will suffer initially after filing bankruptcy.

Life After Bankruptcy

Once you complete your bankruptcy and you have received a discharge of debts and final decree, it is time to reestablish your credit. If you kept your house in your bankruptcy, you will immediately start rebuilding your credit with timely payments to your mortgage company. If you have not already obtained a credit card while you were in Chapter 13 bankruptcy, we suggest you obtain a credit card to help reestablish your credit. Obviously, the idea is to only charge items on the credit card you can payoff each month. Some credit agencies will tell you to pay all but $5 on the account so that you have a small balance each month. Obviously, we are not suggesting that you start accumulating debt after filing your bankruptcy, but obtaining a credit card is a great way to reestablish your credit.