There may be several solutions available if you are facing collection actions from creditors over past due debts. Depending on the circumstances, you may be able to settle your debts or negotiate new terms with lenders. However, these options may have negative consequences. You could be stuck with a larger principal balance, increased interest, or income tax bills. Alternatively, Chapter 13 bankruptcy can help protect assets from creditors by:
- Stopping foreclosure: An automatic stay is issued when you file for bankruptcy. This temporarily stops all collection activities. If you are behind on your mortgage, filing for Chapter 13 bankruptcy can stop foreclosure while allowing you to catch up on payments. You could even file an emergency bankruptcy petition before the foreclosure sale takes place to halt it. It may also be possible to strip secondary mortgages if your home is underwater (meaning it is worth less than what is owed on the primary mortgage.)
- Halting wage garnishments: Under most circumstances, the automatic stay also stops wage garnishments, although this may not apply for past due child support or alimony.
- Stopping vehicle repossession: Chapter 13 bankruptcy is a great option for saving the vehicle you use to get to and from work. The automatic stay can stop creditors from repossessing your vehicle. If you act quickly, you may be able to get your vehicle back if it has already been seized by creditors. Depending on the circumstances, Chapter 13 bankruptcy may also allow you to reduce what you owe on a vehicle in what’s known as a “cramdown.”
- Discharging debts: Chapter 13 bankruptcy can discharge debts that caused you to experience financial hardship in the first place. These debts may include medical bills, credit cards, personal loans, past due utility bills and certain types of income taxes. During a Chapter 13 bankruptcy, secured and unsecured debts are reorganized into single payment plan that lasts for three to five years. After completing the payment plan, these nonpriority unsecured debts will likely be discharged. Debts discharged in bankruptcy are not considered taxable income by the IRS. This means you will not be obligated to pay a tax bill for debt forgiveness, which would otherwise apply if it occurred outside of bankruptcy court.
Are There Downsides to Bankruptcy Alternatives?
Debt settlement and loan modifications are two common alternatives to bankruptcy. With debt settlement, you attempt to strike a deal with creditors to pay back less than what is owed. Loan modifications are where you agree to new repayment terms with your mortgage lender. This can include negotiating for lower monthly payments or new interest rates. Both options may have disadvantages that include:
- No protection from creditors: Debt settlement and loan modification cannot protect you from creditors, meaning they can continue collection attempts. Both options cannot prevent foreclosure or the seizure of your vehicle and wages.
- Tax bills: Debts that are reduced during a settlement are considered taxable income by the IRS. You could end up paying a large tax bill if you choose to reduce debts through a settlement.
- Unfair terms: If you are behind on mortgage payments, a loan modification may help save your home. However, it could also mean agreeing to unfair terms. For example, you may end up paying more in interest and fees. During the trial period of a loan modification, you make lower monthly payments for three to nine months. These lower monthly payments do not satisfy your minimum monthly obligation, meaning they count as late payments. This can drive down your credit score. If your loan modification is denied within the three to nine-month period, you may end up owing thousands of dollars in late fees.
Whether Chapter 13 bankruptcy is the right choice for you comes down to a simple question: What do you have that you want to protect? Chapter 13 bankruptcy is not for people who have nothing to protect. It is an excellent choice for people who have important assets that they want to keep from being seized by creditors.
If you are struggling to pay back debts and want to save your most important assets, the Kansas City bankruptcy attorneys at The Sader Law Firm can help you look at possible options. Our firm also offers $0 up-front Chapter 13 filing options.