Filing Chapter 13 bankruptcy will allow you to create an individual plan to repay all or part of your debts. With a Chapter 13 bankruptcy you will also be afforded the ability to repay your debts over three to five years. The exact time will be dictated by the Court and will be decided upon based upon your monthly income. While you are engaged in the repayment plan your creditors will not be allowed to continue their collection efforts and prohibited from beginning new collection proceedings.
The Court will determine which of your debts must be paid in full and which of your debts will be partially forgiven. To do this they will categorize your debts into three categories.
- Secured debts
- Priority unsecured debts; and
- General unsecured debts
Secured Debts are debts that are secured by some form of collateral. The most common form of secured debt is your mortgage or home loan. Other secured debts are car loans, and property tax debts.
Priority unsecured debts are debts not secured by collateral but debts the Court deem must be paid in full. Priority unsecured debts are typically income tax debt, spousal or domestic support, or past due child support payments.
General unsecured debts consist of credit cards, personal loans, medical bills or any other line of credit that remains outstanding. The Bankruptcy Court considers the general unsecured debt a lower priority and the will work with you to find an affordable payment plan. Typically the Court would like the creditors to receive payment of at least the amount they would have received should you have filed Chapter 7 bankruptcy.
How Long Does Chapter 13 Stay On Your Credit?
The Fair Credit and Reporting Act dictates that a Chapter 13 bankruptcy can only remain on your credit for up to ten years after the date you first filed. However, may people find that the Chapter 13 bankruptcy notices falls off their credit reporter closer to seven years. The impact on your credit will vary depending on your original score and the steps you take to improve your credit standing throughout the Chapter 13 repayment plan.
While ten years is a long time to have the bankruptcy notation on your credit, consider how long your credit would have been affected had you not filed bankruptcy. Most people who file bankruptcy have missed multiple credit card or other loan payments, have possible defaults filed against them or may have experienced a lawsuit or repossession due to lack of payment. All of these repercussions have a strong negative impact on your credit. For many individuals declaring bankruptcy will allow you to begin rebuilding your credit history faster than working out payments plans with your various creditors.
What Happens After Chapter 13 Is Paid Off
After you file Chapter 13 bankruptcy the next hurdle is rebuilding your credit. To do this you will need to do two things, secure new credit and show your ability to pay. While you may be hesitate to open a new trade line or credit card, as they no doubt were part of the reason you filed bankruptcy, opening a new line of credit it key in building your credit. Typically consumers are able to open a new line of credit between one to three years after filing bankruptcy. Upon opening the line of credit you must promptly pay your monthly bills to prove your credit worthiness. Your credit score will begin to gradually rise as you show your ability to pay obligations on time.