Chapter 13 bankruptcy provides debtors with a legal option for restructuring overwhelming debt and can eliminate some obligations. It also allows the debtor to keep secured property, such as a home or car, with few restrictions. However, it is a long-term process and more expensive than  Chapter 7. Also, most debts must be paid in full through the payment plan, so it does not offer the immediate relief of Chapter 7.

To understand the pros and cons of Chapter 13, we must first understand the difference between Chapter 7 and Chapter 13.

How Does Chapter 7 Bankruptcy Work in Athens?

Chapter 7 bankruptcy requires the bankruptcy trustee to sell all of the debtor’s non-exempt assets to repay creditors. Certain exempt assets, such as retirement savings, remain in the possession of the debtor. All eligible debts are then wiped out.

The process is quick, taking three to six months.

Here are some key characteristics:

• Eligibility: To qualify for Chapter 7, individuals must pass a means test showing their income is below the state’s median. Higher wage earners may still qualify if their disposable income is severely limited.
• Asset liquidation: The bankruptcy trustee sells all non-exempt assets and uses the proceeds to reimburse creditors. However, Georgia has exemption laws allowing individuals to protect certain assets from seizure.
• Discharge of debts: Chapter 7 provides a discharge of unsecured debts, such as credit card debt and medical bills, relieving individuals from personal liability for these obligations.
• Repayment of secured debts: Individuals can choose to surrender secured assets, like a home or car, and be released from the associated debt. Alternatively, they can reaffirm the debt, allowing them to retain the asset and continue making payments.
• Quick process: Chapter 7 bankruptcy is typically resolved within a few months, compared to three- to five years for Chapter 13.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 bankruptcy requires the development of a repayment plan to pay down debts over a three- to five-year period.

Key attributes of Chapter 13 include the following:

• Eligibility: Chapter 13 requires petitioners to have a regular income, unsecured debts less than $419,275, and secured debts less than $1,257,850.
• Debt repayment plan: Petitioners propose a repayment plan to the court, detailing how they will repay their debts over three- to five years.
• Asset Protection: Chapter 13 allows individuals to keep their assets while catching up on delinquent payments, such as mortgage or car loan arrears.
• Discharge of remaining debts: Upon successful completion of the payment plan, the court discharges some types of remaining unsecured debt.
• Longer process: Chapter 13 bankruptcy requires a three- to five-year commitment.

Key Differences between Chapter 7 and Chapter 13 Bankruptcy:

• Chapter 7 involves the liquidation of all non-exempt assets, while Chapter 13 entails a repayment plan based on income.
• Chapter 7 is quick, taking just a few months, while Chapter 13 requires a longer commitment of three- to five years.
• Chapter 7 discharges eligible unsecured debts, while Chapter 13 discharges eligible debts after the completion of the repayment plan.
• Chapter 7 may require surrendering non-exempt assets, while Chapter 13 allows individuals to keep their assets while catching up on missed payments.
• Chapter 7 is suitable for individuals with limited income and significant unsecured debts, while Chapter 13 is appropriate for those with a regular income who need to protect their assets..

For further information, you can refer to the U.S. Courts’ website on Chapter 13 Bankruptcy Basics.

Pros of Chapter 13

Some of the primary benefits of Chapter 13 include the following:

• Asset retention
• Foreclosure and repossession prevention
• Debt consolidation.
• Flexibility in repayment
• Extended repayment period
• Discharge of remaining eligible debts
• Protection from creditor actions
• Co-signer protection

Asset Retention

In Chapter 13, debtors retain their assets, repaying their debts on a restructured basis approved by the court. Chapter 13 plans are based on a comparison between income and reasonable living expenses. By adhering to the plan and making regular payments, debtors keep their assets, such as homes or cars.

Foreclosure and Repossession Prevention

Chapter 13 halts foreclosure and repossession proceedings as soon as the petitioner files. Unlike Chapter 7, the debtor keeps secured property by adhering to a court-approved repayment plan. For instance, individuals can bring their mortgage or car loan payments current through a five-year payment plan that restructures their debt payments to an affordable level.

Chapter 13 is especially effective at permanently stopping foreclosure or repossession While these actions must stop in a Chapter 7 according to the automatic stay, lenders can restart seizure proceedings once a Chapter 7 ends. However, in Chapter 13, provided the debtor adheres to the terms of the repayment plan, he retains possession of the secured property, such as a home or car.

Debt Consolidation

Chapter 13 bankruptcy offers the opportunity to consolidate debts into a single affordable payment plan. Through the court, individuals combine various debts, such as credit card bills, medical expenses, mortgages, car payments, and other obligations into one payment. The court then distributes funds to the creditors.

This streamlines the debt repayment process, allowing debtors the convenience of making one payment instead of many while reducing interest rates and penalty

Flexibility in Repayment

Chapter 13 bankruptcy provides debt payment flexibility. The payment plan in Chapter 13 is tailored to the individual’s income and reasonable living expenses, allowing for a more manageable and affordable payment structure. This flexibility ensures that individuals meet their financial obligations while still having the means to cover essential living expenses.

Extended Repayment Period

In Chapter 13 bankruptcy, the payment plan lasts three to five years, depending on the level of debt and the borrower’s income. During the opening stages of the bankruptcy, the debtor submits a payment plan for approval by the bankruptcy court. The judge considers the means of the petitioner compared to the debt in determining the length of the plan.

Below we provide examples of a three-year and a five-year payment plan:

Three-Year Payment Plan Example

If the debtor’s current monthly income is less than the state’s median income, the court may approve a three-year plan. In that case, the court determines how much the debtor can afford to pay each month towards his obligations and retain enough income for living expenses. After 36 months, any unsecured debt not paid in full is discharged.

Five-Year Payment Plan Example

If the debtor’s current monthly income is above the state’s median income, a five-year repayment period is typically required. In that case, the court determines how much the debtor can afford to pay each month towards his obligations and retain enough income for living expenses. After 60 months, any unsecured debt not paid in full is discharged.

It’s important to note that these examples are simplified and the specific details of each case vary. The court determines the payment period based on the debtor’s income, expenses, and ability to repay creditors over the designated timeframe. Working closely with a bankruptcy attorney is crucial to properly assess eligibility and determine the appropriate payment period.

Discharge of Remaining Eligible Debts

At the conclusion of a successful Chapter 13, the court discharges any remaining eligible unsecured debts, providing borrowers with relief from further liability. Debts that are eligible for discharge in Chapter 13 include unsecured debts like credit card bills, medical expenses, and personal loans, among others. The discharge means that individuals no longer have a legal obligation to pay those debts and creditors can engage in no collections activities for those debts.

Protection From Creditor Actions

Chapter 13 bankruptcy provides debtors with protection from creditors through an automatic stay. When a person files for Chapter 13, the court issues an automatic stay, immediately halting collection actions by most creditors. This protection prevents creditors from pursuing legal actions, such as foreclosure, repossession, wage garnishment, or harassing collection calls. It gives debtors the breathing space and peace of mind they need to work towards a successful repayment plan and regain control of their financial situation.

Co-Signer Protection

Chapter 13 bankruptcy offers protection for co-signers, providing them with relief from certain liabilities. When an individual files for Chapter 13, the automatic stay prevents creditors from taking collection actions against both the debtor and any co-signers. As a result, co-signers are shielded from potential lawsuits, wage garnishments, or other collection efforts by creditors. By including co-signed debts in the Chapter 13 repayment plan, debtors can fulfill their obligations and co-signers avoid the negative consequences associated with bad debt.

Cons of Chapter 13 in Athens

While Chapter 13 can provide vital assistance for debtors, there are some drawbacks to be wary of, including the following:

• Lengthy repayment period
• Limited disposable income
• Non-completion risk

Lengthy Repayment Period

One drawback of Chapter 13 bankruptcy is the lengthy repayment period, typically lasting three- to five years. The extended commitment may feel burdensome for some households, as it requires consistent monthly payments over an extended period.

Limited Disposable Income

Under Chapter 13, debtors must allocate the lion’s share of income towards the payment plan. Because of this, they must adhere to a strict budget, with limited flexibility for discretionary spending. It can be challenging for some debtors to adjust to this constrained financial lifestyle for an extended duration.

Non-Completion Risk

Completing a Chapter 13 payment plan successfully is crucial for achieving the intended debt relief. However, there is a risk of plan failure, particularly if unexpected financial circumstances arise.

For example, a job loss, income reduction, or other unforeseen events can make it impossible to maintain the required payments. Though the court may approve a change in the plan if a debtor fails to meet the plan requirements, it can also dismiss the case, leaving the debtor exposed to creditors.

The advantages and disadvantages of Chapter 13 bankruptcy vary based on individual circumstances. Consulting with a bankruptcy attorney is highly recommended to fully understand the implications and assess whether Chapter 13 is the right option for your specific financial situation.

Contact Morgan & Morgan for a bankruptcy consultation.

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