I often have clients who are concerned that if they don’t “qualify” for a Chapter 7, they don’t want to do a bankruptcy at all. Perhaps they don’t qualify due to higher income, or due to a previous Chapter 7 filing in the last eight years. These clients have a vague idea of what a Chapter 13 bankruptcy is – a repayment plan – and don’t feel it’s “worth” doing a bankruptcy if they have to pay their creditors. Isn’t that why they are seeing a lawyer in the first place, because they cannot afford to pay the creditors? Chapter 13 bankruptcies can be difficult, so I understand the hesitation. But before making a decision a person should know more about what a Chapter 13 Bankruptcy actually is, and also how to weigh that option against his current situation.
A Chapter 13 bankruptcy is most often an income-based repayment plan. Your creditors are split up into categories, so that secured creditors, like mortgage holders and car note holders, get close to or exactly what they are owed. But your unsecured creditors, like credit cards, medical bills and late utility amounts, get a percentage of what you owe them based on your income and what you can afford.
A Chapter 13 is not strictly debt consolidation. It is a bankruptcy, which lets you pay for the things you want to keep, such as your home or car, while often paying much less to other creditors. In this way, you can afford to be in the bankruptcy, save your home or car, and get a discharge of your other debts after completing the plan. This should be balanced against continuing to pay minimums on credit cards, with interest, for five years, to see how a Chapter 13 bankruptcy can benefit even higher income debtors or debtors who have previously filed a Chapter 7 bankruptcy within the past eight years.