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Chapter 13 Bankruptcy: Is It for You?

Considering bankruptcy? Which chapter of the bankruptcy code should you consider—Chapter 7, Chapter 11, or Chapter 13? Your choice depends upon your financial situation.

Chapter 13—Wage Earner Reorganization

Chapter 13 of the bankruptcy code offers a way to handle outstanding debts that differs from the traditional method of giving up all of your assets in court in exchange for having your debts wiped out. Instead, Chapter 13 basically uses the court to help you restructure your debt payments to your debtors. You can qualify for this as long as your debts are below a certain amount and you have a job and salary that allows you to continue to pay your debts, albeit on a restructured schedule.

The Downside

Yes, a Chapter 13 reorganization will ruin your credit, just as a Chapter 7 proceeding will. Yet it is not as drastic as a Chapter 7 because you are still paying your bills. Still, if a company checking your credit history sees that you have prior Chapter 13 proceedings in your history, it gives them a good reason to decline to give you credit. The fact that you needed a Chapter 13 reorganization is a red flag that you have trouble paying all of your bills on time. You can also expect to pay higher interest fees on loans you are fortunate enough to obtain. You will also have to pay court costs, and up to 8 percent of your assets to the trustee who helps come up with the reorganization plan.

Who is a Good Candidate for Chapter 13?

Chapter 13 is a good choice for people who are behind on their mortgage or tax payments. If you have a co-signer for some of your debt, and a Chapter 7 proceeding would leave them to pay the full amount, a Chapter 13 proceeding will help you reorganize and get back to a sound financial position without leaving your co-signer holding the bag for your unpaid debts. If you filed a Chapter 7 proceeding within the past six years and cannot do it again, Chapter 13 will help you get your affairs in order, and also gives you the opportunity to file for a Chapter 7 proceeding again in a few more years if Chapter 13 does not work out.