Maybe you’ve lost your job, gone through a divorce, or experienced some other life-changing event that has left you struggling to stay on top of your finances. After exhausting every option, bankruptcy may feel like your last remaining option, but you don’t want to lose all of your possessions. You may want to consider filing for Chapter 13 bankruptcy—a type of bankruptcy that allows you to enter into a long-term payment plan that will allow you to pay your debts and retain your property.
However, Chapter 13 bankruptcy is not for everyone, depending on your financial situation and your goals. In addition, the law has certain requirements that you must meet to qualify for Chapter 13 bankruptcy.
The following questions will help you determine whether Chapter 13 bankruptcy is right for you.
Do you want to keep your property?
Chapter 13 is an attractive option for people who want to keep their homes or their cars or any other property they’ve financed, even if they are behind on payments. Once you file for bankruptcy, the balance due on the loan eventually becomes a part of the repayment plan, which is then paid for as long as five years. Provided that you comply with the terms of the payment plan and any other requirements, you will get to keep your property.
On the other hand, maybe you don’t want to keep your property—for example, if you cannot afford your monthly mortgage payment, or you still owe money on a car that needs significant repairs. If you owe a lot of money on property that you no longer want or need, Chapter 13 may not be the best choice for you.
Can you actually keep up with your bills?
In a Chapter 13 bankruptcy, you will enter into a payment plan for all of your debts that came due before you filed for bankruptcy. However, you will also need to continue paying your recurring monthly expenses as they come due. As a result, you will need to cover your monthly expenses, plus make payments toward your Chapter 13 payment plan.
Therefore, to answer this question you need to be brutally honest with yourself. Tally up your monthly household expenses—car payments, rent or mortgage payments, groceries, utilities, clothing, entertainment, etc. Then decide which of those expenses you could realistically do without for the foreseeable future. Compare your expenses against your current monthly income. If you can pay your expenses with money left over, then Chapter 13 bankruptcy may prove a viable option for you.
If you can’t pay your monthly expenses, you may not qualify for Chapter 13, and the court won’t approve your payment plan. In these cases, you may still have Chapter 7 as a viable option.
Do you earn a regular income?
You have to earn regular income to fund a Chapter 13 payment plan, and the court will not approve your plan unless you have demonstrated an ability to make the payments. Obviously, a steady paycheck as an hourly or salaried employee is the easiest way to demonstrate your ability to make payments. That said, you may qualify even if you work on commission or by project, provided that you can submit documentation showing your average income during the last several months. If, however, you are unemployed, you may not file for Chapter 13 bankruptcy.
What kind of debts do you have?
Some debts are dischargeable in a Chapter 13 bankruptcy that are not dischargeable in Chapter 7. For example, marital debts arising from a divorce, debts from loans on a retirement plan, or debts incurred to pay a nondischargeable tax debt are all dischargeable in Chapter 13 bankruptcy. Unfortunately, student loan debt is almost impossible to discharge in either Chapter 7 or Chapter 13.