Understanding the Benefits of Chapter 13 Bankruptcy

Understanding the Benefits of Chapter 13 Bankruptcy Lawyer explains the Means Test - pictured are a male and female professional meeting at a table with laptop and document

As a Philadelphia bankruptcy attorney, I am often asked about the benefits of Chapter 13 bankruptcy. Despite common misconceptions, filing a Chapter 13 bankruptcy can be the best, and sometimes the only option depending upon a debtor’s circumstances. Avoiding forced liquidation of assets, like a home or car, the most common items that people want to avoid losing, makes a Chapter 13 bankruptcy more desirable than other alternatives.

How Chapter 13 Bankruptcy Works

A Chapter 13 bankruptcy is a restructuring of consumer debt through a repayment plan. Unlike Chapter 7 bankruptcy, in a Chapter 13 bankruptcy your debts are not completely discharged or “wiped away.” Instead, in the Chapter 13 bankruptcy allows your debts to be reorganized and structured into a repayment plan that spans a three (3) to five (5) year period based on your available disposable income. At the end of the payment period, any debts that are not paid through the plan are discharged.

Consider Chapter 13 Bankruptcy If:

  • You are behind on your mortgage and want to avoid losing your home in a foreclosure lawsuit or foreclosure sale
  • You are behind on car payments and want to avoid the repossession and forced sale of the vehicle(s)
  • You want to avoid bank account garnishment by the IRS or state tax authority
  • You are behind on child support or spousal support payments
  • You filed for Chapter 7 bankruptcy in the last eight years
  • Your disposable income is higher than the median income allowed for Chapter 7 bankruptcy by law.

Benefits of a Chapter 13 Bankruptcy

There are a number of benefits available to debtors filing a Chapter 13 bankruptcy. Some of these benefits include:

Automatic Stay on Accruing Interest and Penalties

Upon filing bankruptcy, the court places an automatic stay which effectively stops the accrual or interest and penalties on unpaid debts. The automatic stay in bankruptcy also protects from and stops:

  • Creditor harassment
  • Home foreclosure lawsuit
  • Bank account garnishments
  • Wage garnishments
  • Repossession of vehicles
  • Tax lien actions

Stop Foreclosure of Your Home

If you are behind in your mortgage payments, the amount in arrears – or portion you are behind on paying – can be included in your Chapter 13 payment plan. That amount gets spread out over the course of your payment plan and stops the accruing of late fees, penalties and mounting interest. More importantly, any pending foreclosure action is halted, and you may keep your home as long as you keep up the payments that are part of your bankruptcy payment plan.

Reduce Car Loan Payments

In a Chapter 13, the car can be put into the bankruptcy plan, possibly allowing the reduction of the total amount owed. In situations were the payments are “upside down” and you have had car loan for at least two and half years (2.5) years, you may be able to modify or “cram down” the vehicle loan amount to meet the current value of your car. If the car was purchased more recently, the interest rate on the car loan could be lowered significantly depending upon the original rate.

Reduce Tax Actions

In situations where a person owes back taxes to the Internal Revenue Service (IRS), the State of Pennsylvania, or other taxing authority, filing a Chapter 13 bankruptcy can make payment of these debts more manageable because they can be paid over a longer time period and in some cases, the amount can be reduced. Non-priority tax obligations may be discharged in bankruptcy.

Negative Effect on Your Credit is Shorter

Filing for bankruptcy will have a negative effect on your credit. However, the length of time a bankruptcy will show on your credit report is longer for a Chapter 7 bankruptcy than a Chapter 13. A Chapter 13 bankruptcy will remain on your credit report for seven years; a Chapter 7 bankruptcy will remain for ten years. In addition, bankruptcy can be less harmful to your credit than multiple long-term delinquencies.

Seek Trusted Legal Advice to Determine if Chapter 13 Bankruptcy Is Right for You

Because bankruptcy has long lasting effects on your personal financial situation, you should explore your debt resolution options in detail with an experienced Pennsylvania bankruptcy attorney. When you are overwhelmed with trying to make debt payments as interest and penalties mount, Chapter 13 bankruptcy may very well bring you the financial relief you need. Contact us for a consultation today.

About Alfred Abel Law Offices

The attorneys at Alfred Abel Law Offices are dedicated to providing their clients in Pennsylvania and the surrounding areas with practical and effective legal advice. With more than 30 years of practice in bankruptcy law, Alfred Abel, Esq. has the critical expertise and skills to meet the diverse needs of clients facing bankruptcy and provide the guidance you need regarding the benefits of Chapter 13 bankruptcy. Contact us at 215-517-8300 to schedule a consultation.