It’s the classic Chicken and the Egg problem. I need to file bankruptcy but I can’t afford to file. It’s just too expensive. I need a cheap and affordable option.
A fast and inexpensive Chapter 7 bankruptcy is not always the best choice. Consider Chapter 13 instead.
Most people are familiar with the concept of a Chapter 7 bankruptcy. This is the bankruptcy where you just “wipe out your debts.” There is no payment plan and no long term commitment. A Chapter 7 case lasts about 3 to 4 months from start to finish. You basically file a bankruptcy petition, go to a court hearing once, and that’s it for the average case.
A Chapter 13 bankruptcy, by comparison, lasts at least 36 months and frequently 60 months. During that time you are making a payment to a Chapter 13 bankruptcy trustee. The Trustee collects your money and distributes it to your creditors. Typically, your attorney fees for the bankruptcy are included in the payment plan.
How much do I pay back in a Chapter 13 and why does this make sense if I’m broke?
Excellent question and one that is asked frequently.
In many cases, a monthly Chapter 13 bankruptcy payment is $150 or less. Up front costs to file a Chapter 13 bankruptcy typically averages $360. Therefore, at least in the short term, it is much more affordable to get bankruptcy protection with a Chapter 13 case compared to a Chapter 7 bankruptcy.
Chapter 13 has extended financial protection not available with Chapter 7
Although in the long term (36 to 60 months) a Chapter 13 costs more, there are very good reasons to still file a Chapter 13 because its protection extends for the entire 36 to 60 months! If you find yourself in debt again (not intentionally so, but because of circumstances out of your control), then a Chapter 13 bankruptcy can frequently be converted to a Chapter 7 at a later date. Debts incurred while in the Chapter 13 are then included in the Chapter 7 conversion.
While your first thought may be to get out of bankruptcy as soon as possible, Chapter 13 offers a safety net to start over, especially for individuals and families with chronic medical conditions. Another reason to consider Chapter 13 is if you do not have medical insurance. One illness or accident can trigger a huge financial disaster. If you have filed a Chapter 7 bankruptcy within the last 8 years, you do not qualify for another Chapter 7 filing. But, if you had filed Chapter 13 bankruptcy, then there is a good likelihood that you could convert to Chapter 7 during the Chapter 13 proceeding.
When bankruptcy becomes necessary, understand your choices well
Albert Einstein is quoted as saying-
Everything should be made as simple as possible, but not simpler.
Chapter 7 is a simple bankruptcy. But it is sometimes too simple for a larger and chronic income problem. If a person thinks that they can’t afford a bankruptcy, perhaps the bigger issue is that they can’t afford to live under the constant fear and insecurity caused by a lack of financial resources and protection indefinitely. Bankruptcy can’t solve all of those problems, but it is surely worth considering the alternatives available before making a choice.