Some economists say the recession is over, but many Americans are still struggling to feed their families while paying creditors. For some of these consumers, bankruptcy may be the only viable option. But before declaring Chapter 7 or liquidation bankruptcy, consider these three reasons to choose partial debt repayment under Chapter 13.
1. You’re much more likely to resolve mortgage-related problems under Chapter 13. Even the official United States Bankruptcy Court website recommends Chapter 13 above Chapter 7 if you hope to resolve past-due mortgage problems and keep your home. If you go for the Chapter 7 option, you’re much more likely to outright lose your home. In Chapter 13, court officials and your mortgage lender are much more likely to work with you to resolve a past-due mortgage problem and come up with an amenable solution for both you and the lender that doesn’t involve home foreclosure. Remember, most lenders would rather not deal with foreclosure due to the expense, red tape and potential for serious profit loss.
2. Your credit suffers less long-term damage when you choose Chapter 13. Chapter 13 is noted on your consumer credit reports for seven years from the date of filing, while Chapter 7 cases reflect for 10 years from the date of filing. Since you’re partially repaying your debts for three to five years under Chapter 13 and can’t legally get new credit without court permission, the wait to become credit-worthy again is significantly shortened with the Chapter 13 option.
3. Your ego may be less bruised in Chapter 13. No bankruptcy is easy and Chapter 13 is no exception. No matter what option you choose, you must open up your personal and financial affairs for court officials and in some cases, your creditors. Filing bankruptcy is nothing to be ashamed of, though internal feelings of shame and guilt are all-too-common among some people who have had to file bankruptcy. With Chapter 13, you can reassure that inner critic by reminding it that you did not take an easy way out and are repaying your creditors to the best of your ability.
If most of your debt problems are related to federally-issued student loans, tax bills less than three years old, court fines, child support or alimony, then Chapter 13 won’t help you. No type of bankruptcy reduces or cures these types of “priority” financial obligations. The same rule of thumb applies to debts incurred due to illegal activities like drunk driving. If you’re embroiled in a struggle against one or more of these debts, contact someone involved in the situation such as an Internal Revenue Service or family court clerk.
Stephanie Mojica is a writer for Quizzle.com, where she specializes in helping consumers with debt management and financial planning. She’s also a business success and prosperity coach and author of the free report “5 Business Prosperity Secrets.”