Chapter 13 bankruptcy law exists in order to help out folks who need time to restructure their debts in order to resume payment. This distinguishes it from Chapter 7, the other common approach, which leads to liquidation of your assets and a full discharge of your debts. If you're wondering what the point of pursuing Chapter 13 bankruptcy might be, here's what you need to know.
More Time to Pay
The biggest relative advantage of Chapter 13 bankruptcy is that it provides the debtor with an opportunity to get back on their feet and get payments moving again. In most instances, folks have between three and five years to complete the plan.
One downside, though, is that the court will want convincing proof that you'll have the financial resources required to fulfil the requirements of a proposed repayment plan. You'll need to show evidence of your income and your current resources. If the judge finds that you won't actually be able to comply with the plan, you may be forced to pursue a complete discharge instead.
Creditors Take a Small Haircut
Most restructured payment plans do ask creditors to take a small hit in order to make payments possible. In most cases, though, creditors get the bulk of what is owed to them. Should you eventually become unable to continue payments in full, there is still the option to convert your Chapter 13 bankruptcy into a Chapter 7 case.
A big motivator for some folks in pursuing Chapter 13 is that it provides a degree of protection for co-signers. If your parents co-signed on a loan, for example, a Chapter 13 bankruptcy filing implements an automatic stay, preventing creditors from harassing them. This protection is removed, however, if you end up doing a full discharge of the debt. In that scenario, a co-signer or guarantor becomes an unprotected co-debtor.
Keeping Your Property
Another major reason people of filing under Chapter 13 bankruptcy law is that they're allowed to keep their property if the judge approves. The combination of this and the fact that a stay is automatically entered makes Chapter 13 especially appealing to those facing foreclosures on their homes.
Once you do complete your repayment plan, your creditors cannot pursue the debts covered by it ever again. Those obligations are considered paid in full, although any new debts you take on after filing won't be included.