What are the advantages and disadvantages?

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Updated: 4/13/2007 3:35 pm
Filing bankruptcy is a serious matter that can have long-lasting consequences, both negative and positive. Thus, before making the decision to declare bankruptcy, it’s always important that you’re aware of both its advantages and disadvantages. With a Chapter 13 bankruptcy, perhaps the main advantage you’ll receive is the ability to keep your property while you pay your creditors under a repayment plan using your future income. Unlike a Chapter 7 bankruptcy, you’ll be given time to catch up on delinquent payments and avoid foreclosure or repossession on your house and car. You’ll also be able to modify the interest rates on certain loans and extend the payment term on most debts to make them more affordable. Furthermore, Chapter 13 permits a broader range of debts to be discharged than a Chapter 7 proceeding. Of course, there are some debts that aren’t dischargeable under any Chapter of bankruptcy, such as alimony, child support, student loans, and recent taxes. If your wages are being garnished to pay for these non-dischargeable debts, a Chapter 13 filing would stop the garnishment and allow you to repay these debts over the course of your repayment plan, without further interest or penalties. Your ability to stick with your repayment plan is the key to a successful Chapter 13 bankruptcy. This can be a disadvantage if you’re not disciplined enough to live under a firm budget during the repayment period. You’ll also need to consider the great amount of attorney involvement required over a long period of time. This usually results in higher attorney fees than normally charged for a Chapter 7 case. The trustee handling your case is also entitled to a commission on your monthly payments to creditors, which can reduce the value of what is paid to your creditors. While filing and completing a Chapter 13 plan can leave you with the satisfaction of paying your creditors and keeping your property, you’ll still be left with perhaps the greatest disadvantage of filing bankruptcy. A Chapter 13 bankruptcy appears on your credit report for seven years after you file. Your credit rating will no doubt be negatively affected as result. The usual limitations will apply until the bankruptcy disappears off of your credit report. This can include not getting as high a credit limit as you once had and facing higher interest rates and down payments. A bad credit rating, however, can always be repaired over time if you use credit wisely and pay your bills on time. Generally, if you can overcome the disadvantages of filing bankruptcy and you find that the advantages can best solve the majority of your financial problems, then it may be wise to proceed with filing.

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