Going through Chapter 13 bankruptcy could have serious negative and long-term consequences. Here are 7 reasons why Chapter 13 bankruptcy might not be right for you.
Chapter 13 Bankruptcy: What You Need To Know
1. Chapter 13 Failure Rate
The Chapter 13 bankruptcy failure rate refers to the percentage of Chapter 13 bankruptcy cases that do not successfully complete the repayment plan and result in the debtor receiving a discharge of their remaining debts. Chapter 13 bankruptcy, also known as a “wage earner’s plan,” is a type of bankruptcy in which an individual or small business with a regular source of income creates a plan to repay some or all of their debts over a three- to five-year period. Several factors can contribute to the failure of a Chapter 13 bankruptcy case, leading to a lack of discharge and the debtor being left with unresolved debts. Some of the common reasons for Chapter 13 bankruptcy failure include:
- Inability to Make Payments: One of the primary reasons for Chapter 13 bankruptcy failure is the debtor’s inability to make the required payments under the court-approved repayment plan. If the debtor’s financial situation worsens during the plan, they may find it challenging to continue making payments.
- Changed Circumstances: Life events, such as job loss, medical emergencies, or divorce, can significantly impact a debtor’s financial situation. These changes can make it difficult to meet the obligations outlined in the Chapter 13 plan.
- Mismanagement of Finances: Some individuals may struggle with financial management, leading to overspending, accumulating new debt during the repayment plan, or failing to adhere to a strict budget, which can jeopardize the plan’s success.
- Inaccurate Plan or Budget: When creating a Chapter 13 plan, it’s essential to accurately assess income, expenses, and debt. Inaccurate or unrealistic budgeting can result in an unsustainable repayment plan.
- Disagreements with Creditors: If creditors or the bankruptcy trustee object to the proposed Chapter 13 plan or the court does not approve it, the case may be dismissed.
- Failure to Attend Required Meetings: Debtors are generally required to attend meetings with creditors and the bankruptcy trustee. Failure to do so can result in the dismissal of the case.
- Noncompliance with Court Orders: Not following court orders, whether related to the repayment plan or other aspects of the bankruptcy case, can lead to its failure.
2. Chapter 13: High Fees & Costs
Chapter 13 bankruptcy can come with high fees and costs that individuals need to be aware of. First, there are substantial attorney fees, as legal representation is crucial in navigating the complexities of the Chapter 13 process. These fees can vary but often range from a few thousand to several thousand dollars. Additionally, there are court filing fees, administrative expenses, and fees to the bankruptcy trustee overseeing the case, which can collectively amount to several hundred dollars. While these fees can ultimately be included in the repayment plan, they still add to the overall financial burden. Moreover, Chapter 13 requires a debtor to make regular payments to creditors over a three- to five-year period, which can be challenging, and the costs associated with the bankruptcy process can significantly impact the amount of debt that is ultimately repaid, making it important for individuals to carefully consider the financial implications of Chapter 13 bankruptcy.
3. Chapter 13 Bankruptcy is Bad For Your Finances
One of the primary drawbacks of Chapter 13 Bankruptcy is the requirement to commit to a multi-year repayment plan, often lasting three to five years, during which you must make regular payments to creditors. This extended repayment period can strain your finances and limit your ability to allocate income towards other pressing needs or emergencies. Additionally, Chapter 13 can be expensive due to high attorney fees, court costs, and trustee fees, which add to your overall financial burden. Moreover, it significantly impacts your credit score, making it harder to obtain credit in the future or secure favorable interest rates on loans. The bankruptcy remains on your credit report for up to seven years, affecting your financial reputation. Overall, Chapter 13 bankruptcy can be detrimental to your finances in the short term and make financial recovery a challenging and lengthy process.
4. Chapter 13: 50% Worse for Black Debtors
The numbers clearly show that African-American people are not treated fairly when it comes to bankruptcy. A study by ProPublica in 2017 found that black people are over twice as likely to pick the more costly and complicated Chapter 13 bankruptcy option compared to white people in similar financial situations. And, even after they choose this option, black people are twice as likely to see their cases get dismissed compared to white people. We may argue about the reasons for these differences, but the numbers are a strong and clear indication that there’s an issue here.
5. You Don’t Get to Keep Assets If You Fail
In Chapter 13 bankruptcy, if you fail to successfully complete your court-approved repayment plan, you generally do not get to keep the assets that were included in the plan. This is because Chapter 13 involves a structured plan where you agree to use your income to repay a portion of your debts over several years. If you’re unable to meet the plan’s requirements, which can include making regular payments to creditors, your bankruptcy case can be dismissed. In such cases, you often lose the protection from creditors that bankruptcy provides, and they may be allowed to take legal action to seize and liquidate assets to satisfy the outstanding debts.
6. No Money Down, But Less Chance of Success
Think of Chapter 13 bankruptcy like a deal where you don’t have to pay all your attorney fees upfront; it’s sometimes called “no money down.” However, this doesn’t mean it’s actually free. It’s a bit like when a cell phone company gives you a “free” phone but makes you pay a monthly fee for it for a long time. You’re still paying for it, just over a more extended period. The catch is, Chapter 13 is better for folks who are in decent financial shape. If you’re already struggling, choosing Chapter 13 means you’re adding more debt through attorney fees over time.
7. Low Chances of Chapter 13 Success Offers No Improvement to Budgeting Skills
The low chances of success in a Chapter 13 bankruptcy can be a sign that it doesn’t necessarily improve one’s budgeting skills. Chapter 13 requires individuals to follow a strict repayment plan for several years, and when many cases end in dismissal due to financial difficulties, it suggests that people may not have significantly improved their budgeting skills. Instead, it can be seen as a cycle where those already struggling with their finances end up accumulating more debt through attorney fees and then fail to successfully complete the bankruptcy plan. For some, this may indicate that Chapter 13 doesn’t inherently teach better financial management and, in fact, can perpetuate the financial challenges they were trying to overcome in the first place.
Alternatives for Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often called “liquidation bankruptcy,” is a legal process that provides individuals and businesses a means to eliminate most of their unsecured debts by selling non-exempt assets and distributing the proceeds to creditors. While Chapter 7 offers a fresh financial start, it comes with several disadvantages. First, asset liquidation can result in the loss of valuable possessions, though exemptions protect some assets. Second, it severely damages your credit score and remains on your credit report for up to ten years, affecting your ability to obtain credit or loans in the future. Additionally, not everyone qualifies for Chapter 7, as they must pass a means test based on their income and expenses. Certain debts, such as tax debt, student loans, and child support, cannot be discharged. Finally, the process becomes a matter of public record, and it can be challenging to secure new credit and credit cards after filing for Chapter 7, often with higher interest rates and less favorable terms. It is advisable to explore alternatives.
Debt Settlement Vs. Bankruptcy
Debt Management Program
A debt management program (DMP) is a structured financial strategy offered by credit counseling agencies to help individuals manage and eventually pay off their unsecured debts, such as credit card debt, medical bills, and personal loans. With a DMP, the agency negotiates with creditors to lower interest rates, consolidate payments, and create a single monthly payment plan for the debtor. While DMPs can be beneficial for some, there are cons to consider. First, they often come with monthly fees and setup charges, which add to the overall cost of the program. Second, enrolling in a DMP can have a negative impact on your credit score, as creditors may report that you are in a credit counseling program. Additionally, some creditors may not agree to the terms negotiated in the DMP, and not all types of debt are eligible for inclusion. Finally, it’s essential to complete the DMP successfully, as any missed payments can lead to further financial trouble. Before entering a DMP, individuals should carefully weigh these drawbacks and explore other debt relief options.
Debt Management vs. Debt Settlement
Debt Consolidation
Debt consolidation is a financial strategy that involves combining multiple high-interest debts, such as credit card balances, into a single, lower-interest loan or line of credit. The primary goal of debt consolidation is to simplify your financial management and potentially reduce your monthly payments, making it easier to stay on top of your debt. However, it’s important to be aware of the potential drawbacks. First, while debt consolidation may lower your interest rate, it doesn’t necessarily reduce the total amount of debt you owe. If you continue to use credit cards or accrue new debts, you could end up with even more debt. Second, obtaining a consolidation loan may require a good credit score, and if your credit isn’t strong, you may not qualify for favorable terms. Additionally, some people fall into the trap of taking on a secured debt, such as a home equity loan, which puts their assets at risk if they can’t make the payments. Finally, if you don’t address the root causes of your debt, like overspending or poor financial habits, debt consolidation may offer only temporary relief, and you could find yourself in a similar situation in the future.
What’s The Difference Between Debt Consolidation And Debt Settlement?
Credit Counseling
Credit counseling is a service offered by nonprofit organizations to help individuals manage their finances and develop strategies for debt repayment. It typically involves a one-on-one session with a certified credit counselor who reviews your financial situation, offers budgeting advice, and may help you create a debt management plan. While credit counseling has benefits, it’s important to consider the potential drawbacks. One of the main cons is that the advice provided may not be tailored to your specific circumstances, and some credit counseling agencies may have affiliations with creditors, potentially creating a conflict of interest. Credit counseling can also impact your credit score, as creditors may report your enrollment in a counseling program. Additionally, not all creditors are willing to work with credit counseling agencies or accept their proposed repayment plans. Lastly, while some credit counseling services are free or low-cost, others charge fees that can add to your financial burden, so it’s essential to carefully evaluate the cost and benefits of credit counseling before proceeding.
Should You Choose Debt Settlement Or Credit Counseling?
Debt Settlement
Debt settlement is a debt relief strategy that involves negotiating with creditors to reduce the total amount of debt you owe. This approach is typically used by individuals facing financial hardship and struggling to pay off their debts in full. Debt settlement offers:
- Debt Reduction: Debt settlement can significantly lower your overall debt, often resulting in settlements that are much less than the original balances.
- Faster Debt Relief: It offers a quicker path to becoming debt-free compared to making minimum payments or debt consolidation, which can take several years.
- Lower Monthly Payments: With reduced debt amounts, your monthly payments become more manageable, making it easier to regain financial stability.
- Bankruptcy Alternative: Debt settlement provides an alternative to filing for bankruptcy, which can have long-term consequences on your credit and financial reputation.
- Debt Resolution: It offers a structured and focused approach to resolving your debt issues and working toward a debt-free future.
- Avoiding Legal Action: Successfully settling your debts can help you avoid creditor-initiated legal actions like lawsuits and wage garnishments.
Explore the Pros and Cons of Debt Settlement
In Need Of Debt Relief?
Many people who have trouble making ends meet accumulate debt quickly. CuraDebt is here to find the best debt-relief option available to you. CuraDebt has been helping individuals and small businesses for over 22 years nationwide. As of May 2023 CuraDebt received a score of 5 out of 5 on CustomerLobby for a total of 1179 customer views. CuraDebt is an Accredited Member of the American Fair Credit Council. Contact us for a free consultation. 1-877-850-3328.