Bankruptcy proceedings confuse and even intimidate many people, which can lead to unnecessary delays in filing that only cost the person involved more money and stress. Part of the reason that people hesitate about securing the protections offered through bankruptcy despite going through financial hardship is a lack of understanding about the benefits bankruptcy offers and how the process actually works.
Bankruptcy is complex, with multiple different versions of bankruptcy available to different people, as well as different kinds of businesses. Farmers, for example, might need to file Chapter 12 bankruptcy after several bad seasons in a row leave them unable to pay their bills. Individuals with very few personal assets and income below the state median may qualify for Chapter 7 bankruptcy.
Many individuals who have their own home or other valuable assets will find themselves considering Chapter 13 bankruptcy, which is also called a wage earner’s plan. There are multiple benefits to Chapter 13 bankruptcy, which is a form of personal bankruptcy that includes a repayment period during which creditors receive partial payment for the outstanding debts held by the person filing. There are three common reasons why Chapter 13 bankruptcy works well for many people.
There’s no limit on your income
As previously noted, only those with income below the state average typically qualify for Chapter 7 or liquidation bankruptcy proceedings. Limiting the income of those who file for this more aggressive form of bankruptcy protects lenders and banks from fraudulent bankruptcy filings to avoid repaying valid debts.
Unlike Chapter 7 bankruptcy, which you may not qualify for, Chapter 13 bankruptcy is typically available even to those who make very high average wages. After all, those with higher incomes typically also have higher costs of living to cover as a result of their position and success. Their mortgage could cost more every month than the total income that could qualify someone for Chapter 7 bankruptcy.
Just because someone makes good money doesn’t mean they can’t also accumulate dangerous levels of debt. Unlike income, there are debt limits on Chapter 13 proceedings, which get updated regularly to reflect inflation and cost of living averages. Provided that your unsecured debt is $394,725 or less and your secured debts, like a mortgage, don’t exceed $1,184,200, you can likely benefit from Chapter 13 proceedings.
You don’t have to worry about losing your assets
When you file Chapter 7 bankruptcy, the courts expect you to provide an inventory of all of your assets, including the equity in your home. Those assets are often vulnerable to seizure by the courts for liquidation in order to repay creditors.
Although there are exemptions, including a specific amount of home equity that people can protect, those with more substantial assets may lose more than they gained through Chapter 7 proceedings. Filing Chapter 13 bankruptcy gives you an opportunity to work to repay your creditors while also protecting the assets you’ve acquired during your working life.
You have a chance to do the right thing
Many people shy away from bankruptcy because they view it as unethical to discharge their debts instead of repaying them. However, a significant amount of what many people pay to their creditors will not be the principal that they borrowed but rather financing fees and interest.
When you file for Chapter 13 bankruptcy, the courts renegotiate your debts, typically eliminating or reducing the penalties and fees creditors assess you. Once you complete your repayment., the remaining unsecured debt typically gets discharged.
You can still have the protection of closing out those accounts while making every effort to reasonably repay them to the best of your ability. For those who feel conflicted about bankruptcy because of their ethical obligations after borrowing money, Chapter 13 bankruptcy may be the simplest solution.