How Does Chapter 13 Work and Who Is It Designed to Help? Skip to main content

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How Does Chapter 13 Work, and Who Is It Designed to Help?



Is Chapter 13 the way to a better financial future?
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When it comes to filing North Carolina bankruptcy, there are two types open to most consumers—Chapter 13 and Chapter 7. Both can help with debt, but they’re drastically different in how they help, the type of debt they’re best to address, and how they impact your long-term financial future. Many people see ads on TV about one or the other and come into our offices with a preconceived notion of which they want to file. But what you see on TV and the reality for your life are not the same. Here’s a look at how Chapter 13 works and the debt it's designed to defeat.

Chapter 13 is Designed to Protect Assets and Higher Earners

For those earning a healthy income that can’t pass the Means Test, Chapter 13 may be your only option. Chapter 13 is a repayment plan that allows you to catch up on past-due balances to secured creditors like your mortgage lender or car loan lender.

It’s not designed for those who have primarily unsecured debts like credit cards and medical bills and no assets to protect. If you can pass the Means Test, Chapter 7 may be a better route because it gets rid of your debt ASAP so you can move on with your life.

Chapter 13 Puts You On a Repayment Plan to Catch Up Back Debt

Chapter 13 sets you up on a repayment plan to deal with past-due balances on your car loan and mortgage, but you have to be able to afford the plan to qualify. For instance, if you are behind 12 mortgage payments and three car payments, the plan could help.

Say your mortgage payments are $1500 and your car payments are $400. That means you’re $19,200 in debt. There are fees and court costs tacked onto that amount and, if you can’t afford to pay your lawyer up front, their fees can also be included in that amount.

Rounding up, let’s say your repayment plan is $25,000. On a five-year repayment plan, that’s $5k a year or $420 a month, roughly. You must be able to pay your monthly mortgage of $1500 and your $400 car payment plus the $420 a month. That can be a challenge.

However, at the end of your repayment plan, you’ll be current on your secured loans and a portion of your unsecured debt, like credit cards and medical bills, can also be discharged so that you come out of Chapter 13 bankruptcy in better financial shape.

Chapter 13 Seems Like a Better Option to Many Consumers

For many North Carolina consumers mired in debt, Chapter 13 seems preferable because they want to catch up their bills. They also don’t want to give up their home if they’ve fallen behind on payments. In some cases, it is a better fit.

But if you can’t afford your home in the long-run, then Chapter 13 bankruptcy is only a Band-Aid. If you have no equity, it might be better to surrender the home and move to a more affordable rental, save up a down payment, and then buy a more affordable home later.

These are difficult choices, and it can be hard to look past immediate impacts such as losing a home you love and explaining to your children that you have to move, possibly changing school districts, etc. The bottom line may be that you have to make some tough choices for your financial well-being.

Come In for a Free North Carolina Bankruptcy Consultation

We recommend you come in with all your financial info and an open mind and let us explain the options and advise which bankruptcy chapter is a better fit for you. If bankruptcy is not what’s best for your finances, we’ll tell you that as well. Bankruptcy isn’t right for everyone.

In the end, no matter what we recommend, it’s your choice and we’ll be there to help you every step of the way. Contact the Law Offices of John T. Orcutt today for a free North Carolina bankruptcy consultation to discuss your finances and find out how we can help.

Call +1-919-646-2654 now for a free North Carolina bankruptcy appointment at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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