- Instead of eliminating all debt and liquidating your assets as with Chapter 7 filings, Chapter 13 provides a means to reorganize your debt, although you'll still be liable for the amount you borrowed. Under Chapter 13 proceedings, the court structures a payment plan that reduces or eliminates your interest rate and sometimes waives penalties. In turn, your creditors receive the court-ordered assurance that you'll repay your debt as scheduled. To qualify, you must be earning a stable income, though proceedings will allow you to maintain your personal property through the filing.
- One of the biggest advantages Chapter 13 bankruptcy provides homeowners is that it can be used to forestall foreclosure. Homeowners in Chapter 13 are allowed to restructure their mortgages to catch up on missed payments, so its impact upon home ownership isn't nearly as heavy as that of Chapter 7.
- Once you agree to a Chapter 13 reorganization, you'll be legally bound to a payment plan determined by court proceedings. Although the length of this plan varies from case to case, it may be no longer than five years. During this repayment period, your credit will be severely restricted, and you're likely to only be able to receive credit cards secured by a deposit as your primary source of credit.
- Once you emerge from Chapter 13 proceedings and pay off your debts, you face a two-year period where you're ineligible for a home loan. After that period, you may receive a mortgage, although a down payment of 15 to 20 percent may be required to secure the loan. Other lines of credit, such as auto loans and traditional credit cards, will be available immediately after you emerge from bankruptcy protection, although you'll face much higher interest rates following your bankruptcy.
- Chapter 13 isn't a permanent blotch on your credit score, and you may slowly rebuild your credit following the reorganization. Ideally, you should open four lines of credit -- and properly manage them -- to demonstrate your ability to make payments on time and keep your finances in order. Again, interest rates will be initially high as a consequence of Chapter 13 bankruptcy, although after a couple years of responsible financial management, you should be able t begin to renegotiate interest rates, or graduate to credit cards with higher limits and more favorable terms.