Income Tax Rates

When you first read about the provisions of Chapter 13 bankruptcies, it seems like an attractive debt management option. However, one of the top reasons to avoid Chapter 13 is that it sets unrealistic goals for the debtor. First, you need to understand what chapter 13 is.

When weighing the options that the different types of bankruptcies can offer, understand that debt counselors will recommend Chapter 13 to anyone who owns a leverage asset, such as a home. As well, for a debtor with back taxes or assets that have a lower value that what is owing against them, Chapter 13 will also be the avenue of choice. Typically, Chapter 13 allows the debtor to repay a portion of the debt, rather than the debt in full, provided the debtor can prove sufficiently that he cannot repay the full amount.

Chapter 13 allows debtors to keep an asset that does not come under exemption. You can file chapter 13 every four years. In return, you have to come up with an acceptable debt repayment plan that aims to repay loans through your income. Chapter 13 is in force for a period of three to five years, during which you must make regular payments toward clearing the debt. Creditors must forfeit the remaining amount once chapter 13 payment plan ends. Until chapter 13 is in force, your creditors cannot hike interest rates. Sounds too good to be true? It probably is.

One of the top reasons to avoid Chapter 13 is specific requirements must be met by the debtor. The first thing is that debtors must have a steady income. This means that folks who have experienced temporary setbacks in employment and have trouble making ends meet (which probably led them to explore such an option) are ineligible. Furthermore, the income level must actually exceed thresholds determined by the government, making Chapter 13 something of an ironic filing as debtors with the capacity to repay their debts would be far better served by repaying the debt in full rather than ruining their credit and risking the fall-out.

Another one of the top reasons to avoid Chapter 13 is that it requires adherence to the court's approved plan. Although surrendering to such demands might seem like a small trade-off for the amount of debt that gets cleared, many debtors feel just as trapped as they would with a traditional budget. Not only that, but Chapter 13 is considered a public record, meaning that unlike a traditional do-it-yourself budget plan, anyone can look into the debtor's financial affairs. In fact, the courts can even order changes if the debtor's circumstances improve.

What really resonates with debtors is the fact that Chapter 13 also allows win falls such unexpected winnings or inheritance to be surrendered to the trustee in order to repay debt. This means that over the course of the plan, the debtor cannot substantially improve his financial affairs. As well, spouses may also be required to provide details of assets, income and expenses even when a Chapter 13 filing is not make jointly.

Before considering Chapter 13 bankruptcy, debtors are wise to consider creating their own debt repayment plan, particularly if they have the means to repay their debt. Two of the biggest benefits with this route include keeping the debtor's financial circumstances out of the public domain while simultaneously improving credit rather than ruining it.