Pros and Cons of Chapter 13 Bankruptcy

The different types of bankruptcy filings have different advantages for different people. Although the Chapter 13 bankruptcy filing process is complicated, it may offer greater benefits to you in the long term than Chapter 7 bankruptcy.

The major difference between Chapter 7 and Chapter 13 bankruptcies is the payment method. In Chapter 7 bankruptcy, you pay creditors with assets – that is, you liquidate real estate, cars, and so on in order to create money to pay creditors. As a result, Chapter 7 is a short-term process based on giving up wealth rather than income. In Chapter 13 bankruptcy, you pay creditors over a period with disposable income. You use this income to eventually pay creditors while protecting your personal property.

Assuming your payment plan is feasible and you are able to complete it, Chapter 13 bankruptcy usually offers more money to creditors than Chapter 7 (although less than the debt itself), so creditors usually prefer it. Additionally, it affords you the ability to eliminate your debts without a drastic change in your standard of living. Furthermore, at the end of your Chapter 13 bankruptcy proceedings, you will be cleared of all named debts, unlike Chapter 7. Your payment rates will usually be lower, too, since creditors acknowledge that you are paying them back with an income and offer a lower interest rate. Perhaps most noticeably, Chapter 13 bankruptcy places a stay on creditors calling to try to collect on their debts as long as you are staying with your payment plan.

On the other hand, the Chapter 13 bankruptcy process can be long and complicated. You must be able to commit to giving up all your disposable income for a three- to five-year period. In addition, you run the risk of still having to sacrifice assets if you cannot meet your plan. The process itself can be complicated, and it can sometimes get expensive, between filing and attorney costs. That is why it is important to be prepared and knowledgeable when beginning the process.

Although Chapter 13 bankruptcy is not for everyone, it can offer many long-term benefits over Chapter 7 bankruptcy. If you are considering bankruptcy, it is important for you to determine as much information as possible about your financial situation in order to decide which is best for you.

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Graham Billings

Graham Billings is a senior at the University of North Carolina at Chapel Hill with a double major in Economics and Political Science. He plans to graduate in December of 2009 and then attend law school in the fall of 2010. He is a member of the Economics Club at Carolina, which brings in speakers and hosts events in order to discuss current economic issues and help those who do not have a background in economics become more familiar with it. He is a National Merit Scholar and Dean’s List recipient. He is originally from Greensboro, North Carolina and attended the Early College at Guilford for high school, taking classes at Guilford College. In addition to economics, his academic interests include the legal and political system. He headed the only student-run, high school-level Honor Court in high school and participated in a national model Congress in San Francisco, run by Harvard students, and won awards of excellence for his work on the mock Supreme Court. Additionally, he tutors Carolina students in economics on a volunteer basis.

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