Advantages of Paying off Debt Through Chapter 13 Bankruptcy

Many people today have amassed large amounts of consumer debt. They are having great difficulty paying their minimum monthly expenses and rarely pay anything toward their principal balances. Their financial situation continues its downward spiral until they reach a point where they are willing to take action. When they arrive at this crossroad there are several financial options available, one of which is bankruptcy. Although filing for personal bankruptcy is not always the best choice it has continued to grow in popularity over the last few years. Let's take a closer look at one alternative called a chapter 13 bankruptcy.

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A chapter 13 bankruptcy is used when an individual can not meet his financial obligations but he wishes to repay his creditors. In order to qualify an individual must owe less than $250,000 of unsecured debt. A court will review your financial records and establish an affordable monthly repayment plan that will last anywhere from 3 to 5 years. Creditor payments will be issued from this monthly total. At the end of that time period the remainder of an individual's dischargeable debts are released.

Advantages

Length of time reported to credit agencies. The length of time for a chapter 13 is generally 7 years versus a typical 10 years for chapter 7. Three years is a big advantage in re-establishing your credit.
Your credit rating during those 7 years. Until your report is completely clear you will face some obstacles when applying for credit, however, you will not be rated as poorly as an individual filing a chapter 7. (1)
Protects an individual from creditors.
Allows an individual to honor his commitments and make payment arrangements.
An individual will not lose his house, his car, or his personal property.

Disadvantages

If an individual misses one of the chapter 13 payments than the court can dismiss their case.
Length of time reported to credit agency. Although it is an advantage compared to a chapter 7 bankruptcy it is a disadvantage when compared to other alternatives such as debt negotiation through a consumer counseling service.

Careful consideration should be given before determining the best way to handle excessive debt. The option of bankruptcy should never be chosen without exploring all options and understanding the complete ramifications. If the decision is made to file for bankruptcy then chapter 7 may be your best alternative.

(1) http://www.creditinfocenter.com/bankruptcy/chapter13BK.shtml

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.