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How To Get A Personal Loan While In Chapter 13

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

Those who are unable to manage their mounting debts may benefit from filing for bankruptcy in order to start over financially. Although filing for bankruptcy will have a negative effect on your credit, it can stop a foreclosure and allow you time to get your finances under control.
The term “bankruptcy” can refer to a number of different situations. Chapter 13 bankruptcy may be the best option if you have regular income and certain assets.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is sometimes referred to as a wage earner’s plan since one of the prerequisites is a regular source of income. Chapter 13 of the United States Bankruptcy Code describes the insolvency process in detail.

You need to go to the federal bankruptcy court and petition for Chapter 13. The court, assisted by the United States Department of Justice, oversees the procedure.

Over a period of three to five years, Chapter 13 bankruptcy filers work to settle their debts to creditors. A repayment plan outlining the steps to be taken to pay off the debt is developed. The proposal is examined by the court, and its status is then determined.

Your debtors can weigh in as well. In the event that they disagree with your proposal, they might file an objection with the court. The court must take into account the interests of your creditors, but it has final say over whether or not your repayment plan is accepted.

Your payment plan may require you to make partial or whole payments on your debts, depending on the circumstances.

Unfortunately, filing for Chapter 13 bankruptcy is not a free pass to financial freedom. Any and all debts will not fit into a single repayment strategy. If, for instance, you are having trouble paying back student debts, you should consider alternatives to bankruptcy. Your school loans will still be there after filing for bankruptcy.

Bankruptcy under Chapter 13 vs. Bankruptcy under Chapter 7

One might file for bankruptcy under a different chapter besides Chapter 13. Chapter 7 bankruptcy might be preferable depending on your circumstances.

Unlike Chapter 7, which entails the disposal of assets, Chapter 13 bankruptcy allows for a restructuring of debts. It is common practice for Chapter 7 debtors to liquidate part of their assets to satisfy creditors. Chapter 7 bankruptcy is distinguished from Chapter 13 bankruptcy in significant ways.

  • Who May Submit. Chapter 7 and Chapter 13 are both available to people. Companies may also apply for Chapter 7 bankruptcy, but cannot file for Chapter 13 bankruptcy. Similar to Chapter 13, Chapter 11 is another option for enterprises.
  • Income Requirements. Individual Chapter 7 filers are subject to income restrictions. You must be below a specific income threshold or pass a means test demonstrating that your disposable income is insufficient to repay your obligations. Chapter 13 does not have a means test, although a source of income is required.
  • Debt Limits. Chapter 13 bankruptcy may only be filed if your unsecured obligations are less than $394,725 and your secured debts are less than $1,184,200, according to the Bankruptcy Code. These restrictions may vary over time; therefore, consult the Bankruptcy Code for the most recent information.
  • What Happens to Your Real Estate? Except for your principal residence, vehicle, and other essentials, if you declare Chapter 7 bankruptcy, you are often required to liquidate your assets and property to pay off your debts. You can also keep your house and other property if you file for Chapter 13 bankruptcy, as long as you have a repayment plan for your obligations.
  • How Long the Procedure Requires. Chapter 7 usually requires considerably less time than Chapter 13. Once everything has been sold, it will be over. Typically, this occurs after a few months. Depending on your payment plan, Chapter 13 might last as long as five years.
  • Effect on Your Credit Score Chapter 7 bankruptcy remains on a credit report for ten years. Chapter 13 bankruptcies remain on a person’s credit report for seven years. After filing for bankruptcy, you can begin to rebuild your credit in any instance.

Chapter 13 vs. Chapter 11 Bankruptcy

Reorganization bankruptcy also comes in a Chapter 11 form. Chapter 11 is similar to Chapter 13 in that it allows for fresh starts for businesses, although it is more commonly used by large corporations and partnerships. The Chapter 11 bankruptcy process is what you hear about when a firm declares bankruptcy but continues operations.

A Chapter 11 bankruptcy filing requires the company to develop a repayment strategy, which must be authorized by the bankruptcy court.

If you are an individual and don’t qualify for Chapter 7 or Chapter 13, you may consider filing for Chapter 11 bankruptcy. If you have too much debt to qualify for Chapter 13 bankruptcy, Chapter 11 may be your best option. And if you don’t work, that’s exactly how you feel.

Should You File for Bankruptcy Under Chapter 13?

A bankruptcy filing is not a choice to be made quickly or carelessly. It’s not always easy to do, and it may take a while. Your credit score may also take a hit. If you’re one of those folks, you should probably stay away.

However, for some people, filing for bankruptcy is the greatest option to get their finances back on track and begin the credit repair process. If you’re already behind on payments and having trouble making ends meet, declaring bankruptcy may not have a devastating effect on your credit score.

Your debts, your income, and the state of your finances as a whole will determine if Chapter 13 is the best option for you.

  • Consistent Gains Are Being Made By You. To be eligible for Chapter 13, you must have a stable source of monthly income. Chapter 13 might be useful if your income falls short of your monthly payments and other commitments.
  • Your home and vehicle are already in your possession. Avoiding foreclosure or falling behind on your mortgage or auto payments? Chapter 13 may be your best option. As a general rule, Chapter 13 allows you to maintain your principal residence and one car, with the possibility of keeping more vehicles and real estate.
  • Your Unsecured Debts Meet the Requirements. Chapter 13 can help make monthly payments more reasonable for unsecured debts including medical bills, credit card balances, and personal loans.
  • You owe very little or no substantial priority debt. Alimony, child support, and student loans are all examples of claims or obligations that have priority over other claims or debts. These obligations survive bankruptcy.
  • Your Payment Schedule is Acceptable for Repayment. Importantly, you must have the financial means to comply with the court-ordered payment schedule. Failure to make payments may result in the bankruptcy being dismissed and the sale of assets being ordered by the court.
  • It looks like you’re having a hard time making ends meet. Filing for Chapter 13 bankruptcy is like pushing a massive, flashing red panic button. It’s not something you go for if you’re just going through a rough patch or if there are alternative ways to make ends meet, like picking up some extra work or cutting back on your spending. Declaring bankruptcy should be a very last resort.

Chapter 13 Bankruptcy Eligibility

If you have a steady source of income and your total unsecured and secured obligations don’t exceed certain thresholds, you may file for Chapter 13 bankruptcy. Furthermore, there are further prerequisites to meet.

  • All Tax Documentation Must Be Submitted. Keep your tax returns up to date and your tax payments in full.
  • If your bankruptcy was dismissed within the last two years, you are not eligible. If you have had a previous bankruptcy dismissed within the last 180 days due to your inability to cooperate, you will not be able to file for Chapter 13 bankruptcy.
  • No Recent Bankruptcy Filings Allowed. If you’ve ever filed for Chapter 13 bankruptcy previously, the two-year mark must have passed since the discharge. Discharge from any other kind of bankruptcy, including Chapter 7, must be at least four years old.
  • A credit counseling session is something you should definitely attend. Financial counseling is a prerequisite for Chapter 13 bankruptcy discharge.

Bottom Line

To file for Chapter 13 bankruptcy is not a certain ticket to financial freedom. You’ll have to make payments to your creditors according to the terms of your repayment plan, and even then, you may not be completely debt-free.

However, it may be the first step in repairing your credit and gaining a firmer financial foothold, depending on your current monetary predicament.

Consult with a credit counselor and a bankruptcy attorney before deciding to file for Chapter 13 to learn about your alternatives and choose what would work best for your specific financial situation. Take your time with this crucial financial choice.

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