When we are explaining options to clients, Chapter 13 is often a very attractive solution to develop an overall long-term plan for getting finances back on track. This is especially true if there are taxes, self-employment, or a mortgage involved. As we go through how Chapter 13 works, a few of the benefits include:
- Court protection. Creditors cannot file collection actions against you while you are in Chapter 13. This is much different than a debt settlement program where you will likely get sued fairly quickly upon signing up for debt settlement. Chapter 13 also stops any lawsuits that have already been filed.
- Ability to stay in business through the reorganization. Sole proprietors can use Chapter 13 to get their feet back under them, have an established monthly payment, pay back taxes over time without large penalties accruing, and keep earning an income.
- Restructure taxes. Even if you aren’t self-employed, Chapter 13 helps with restructuring taxes and provides court protection from garnishments, levies, and liens.
- Rebuilding of credit. You can rebuild your credit while in Chapter 13. Although, if your credit score is low to start with, filing bankruptcy often makes your credit score go up right away anyway.
- Debt discharged in Chapter 13 is not taxable income. Unlike debt settlement, the debt that is forgiven as part of your bankruptcy is not taxable income that you have to pay taxes on.
Inevitably, we often get the question, “If Chapter 13 can do all that, why don’t more people do it??” And, the answer to that is that most people have no idea what Chapter 13 can and can’t do for them. When you call a debt settlement company, the biggest pro they give you as part of the sales pitch is, “You don’t have to file bankruptcy!” But, they don’t tell you that what you are signing up for is often worse than bankruptcy for your credit, for rebuilding, and for the total cost.
Now, don’t get me wrong, there are cons to bankruptcy as well that I always share with clients when we are deciding what the best route forward is for their situation. You have to be ok with saying that you filed for bankruptcy if asked on a job application or an apartment application. You have to make a payment to the court for a period of time and if you don’t, the debts are not resolved. It takes some planning and responsibility to complete a Chapter 13. However, for many people, if they actually were told from the beginning what it helps with and what it does not, would not hesitate to do it sooner rather than later. In fact, one of the most often said phrases by clients in our offices is, “I wish I would have done this last year or 2 years ago.”
My best advice to anyone struggling with debt or financial stress is to find out what all of your options are, evaluate each option to see what is best for your individual and family situation, and then develop a plan to move forward. Do not be afraid to find out what you can do before signing on the dotted line for any one solution.
This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.