There are so many misconceptions about bankruptcy. One misconception is that bankruptcy is a “quick fix” for people struggling with debt.
Many people feel that bankruptcy is “taking the easy way out.”
In certain instances, chapter 7 bankruptcy can be relatively quick, easy and essentially painless.
On the other hand, chapter 13 bankruptcy can be long, burdensome and places a heavy financial strain on the debtors.
Whether you earn too much money to qualify for chapter 7 bankruptcy, need to pay back mortgage debt to stop foreclosure or want to defer student loans using the bankruptcy process, chapter 13 bankruptcy is sometimes the only available option.
The chapter 13 process requires the debtor(s) to make a monthly payment to the bankruptcy trustee over the course of 36 to 60 months. This road can be long and financially burdensome.
There is, however, a benefit to that burden.
Understanding the Burden
My chapter 13 clients always express shock when I tell them that the bankruptcy laws require all disposable income to be paid to the trustee over the life of the plan. Again, all disposable income.
With limited exceptions and certain strategic planning aside, the chapter 13 process, by law, leaves you on a budget with no surplus cash at the end of each month.
For the most part, medical emergencies, home and car repairs, family vacations and other reasonable expenses are not accounted for in the chapter 13 monthly budget.
Additionally, you are at the mercy of the Bankruptcy Court throughout the chapter 13 process and your financial flexibility is limited.
This is the ultimate burden of chapter 13 bankruptcy and my colleague from Arizona, John Skiba does an excellent job expounding on this point and explaining why almost 70% of chapter 13 cases fail.
Realizing the Benefit
On the other hand, chapter 13 bankruptcy is a powerful legal tool and there is a bright light at the beginning and end of that burdensome tunnel.
The initial benefit of chapter 13 bankruptcy is that you maintain control of all of your assets throughout the process. Contrast this with chapter 7 where by law, all of your assets become part of the bankruptcy estate.
For those behind on mortgage payments, vehicle payments or government tax obligations, the chapter 13 payment plan allows repayment of these debts over a 3 to 5 year period. In most situations, you will not get these “repayment terms” negotiating outside of bankruptcy.
Finally, you are not always required to pay back 100% of your unsecured debt in chapter 13 bankruptcy. Essentially, you will pay back what you can afford and as a result, you can discharge a substantial portion of unsecured debt in chapter 13.
Even if you are required to pay back “100%” of your unsecured debt, it is still a boon. Unsecured debt paid back through the chapter 13 plan is interest free.
So the chapter 13 bankruptcy road is not always lined with flowers. There will be obstacles and difficulties along the path.
It should be remembered that some things are worth fighting for. Your financial future is one of those things.
Image courtesy of LuckyTom (Flickr).