BANKRUPTCY REVIEWS

5 Reasons To Avoid Chapter 13 Bankruptcy

5 Reasons to avoid chapter 13 bankruptcy

A lot of people file chapter 13 bankruptcy for the wrong reasons. There is a misconception in the public that since in chapter 13 you are paying off the debts, it will not be as bad for your credit as a chapter 7 would be. This is a fallacy. The other reason is they feeling of guilt. Many people file chapter 13 bankruptcy because the feel guilty that they would be skipping out on their obligations by filing chapter 7. This too is false thinking. Here are the reasons to not file chapter 13.

Number 1

Chapter 13 bankruptcy is worse for your credit than chapter 7 bankruptcy

To the credit bureaus, bankruptcy is bankruptcy. Any bankruptcy will hurt your credit unless your credit is already bad to begin with. Chapter 7 bankruptcy is better for your credit because it stops the bleeding immediately. When you file chapter 7 bankruptcy all of your debts get wiped out and you get a new fresh start. Many lenders, especially auto dealers will gladly finance your car purchase right after the bankruptcy discharge. They do this because they know that you cannot file another bankruptcy for eight years. They also figure that since you have dumped all of your other debts in the discharge, you will have more money at your disposal with which to repay their debt. Most people are surprised that when they file chapter 7 bankruptcy, they get a flood of offers to get an auto loan.

With chapter 13, the opposite is true. Lenders avoid you like the plague. They figure that since the chapter 13 duration is technically 3 to 5 years, you will be struggling for that long. They also know that since you do not generally get a discharge in a chapter 13 case, you will still be stuck with debt when the 13 is over.

Number 2

Chapter 13 bankruptcy prolongs the agony

When you are strapped with crushing debt, there is nothing more liberating than to be declared debt-free by the court. It is an experience like no other. If you are reading this review, you know how you feel right now. You go to sleep and wake up every day with a sinking feeling. Your thoughts are along the lines of, "How am I going to pay the rent this month?" or "What will happen to my children if we lose everything."

With chapter 7 bankruptcy, the moment you file it, you are free. All the payments to the creditors come to an end and this happens even before your debts get discharged. Right from that moment, you no longer have to worry about borrowing from one lender to pay the other. You no longer have to live in hiding from your creditors and from the harassing phone calls.

Your freedom is immediate!

With chapter 13 bankruptcy, there is no such experience. You wake up the next day after you have filed the chapter 13 bankruptcy feeling like you did the day before. You still have the mountains of debt to contend with. You still have to repay them. The only difference is that it may have helped you to delay a foreclosure or a repossession or it may have enabled you to check off the box that says you tried to repay the creditors.

Number 3

Most Chapter 13 bankruptcies will be dismissed in the first 6 to 12 months

Despite your good intentions, most chapter 13 bankruptcies will get dismissed in the first 6 to 12 months and by 2 years, 90% of them have been dismissed or abandoned. There are many reasons why chapter 13 bankruptcies do not go the distance. The first is that chapter 13 bankruptcy is not right for most people. After filing chapter 13 bankruptcy and making some payments to the creditors through the trustee, most people realize that they are fighting a losing battle trying to repay the debts. For others, it is that the underlying reason they got into crushing debt has not changed. If they fell behind because of illness or because of a loss of wages, that still has not changed.

But perhaps the number one reason they abandon their chapter 13 filing is that they attorney ripped them off silently. There is thing that most chapter 13 bankruptcy lawyers do to doom their client's chapter 13 bankruptcies. The lawyers set up the repayment plan so that they, the lawyers, are the only ones that get repaid, not the creditors. This is the number one reason most chapter 13 bankruptcy fail. Click here to read more about this.

Number 4

Chapter 13 bankruptcies are for people with mild financial problems

Chapter 13 bankruptcy is designed for people with manageable financial problems. In order to be truly eligible for chapter 13 bankruptcy, you are required to be employed or to have regular income. You also have to have disposable income, that is, excess income after expenses, with which to repay the creditors. In other words, you financial problems are mild and temporary. In truth, most people who file chapter 13 bankruptcy have serious financial problems, not mild ones.

Chapter 13 bankruptcy is suitable only for people who have significant equity in their house and are facing foreclosues and need some time to get caught up with the arrearage that they owe. It is not for those who have mostly unsecured debts or for people trying to avoid the repossession of their vehicles.

Number 5

Chapter 13 bankruptcies add to the debt, not reduce it

Contrary to debtor misconceptions, Chapter 13 bankruptcy filing actually increases the debts that you have to pay, not decrease it. The reason is that when you file chapter 13, any money that you repay to the creditors through the trustee come with a surcharge. The trustees have to get paid for their services and so they tack on up to 10% or more to your debt. This is on top of the interest and penalties that you are already paying the creditors.

Who Should file Chapter 13?

We recommend that a person file chapter 13 only if they are not able to file chapter 7 or if they are experiencing a very temporary financial setback and need some time to get caught up on a mortgage that is in the foreclosure process.

For everyone else, chapter 7 is the most effective way to free yourself from debt.


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