Unmanageable credit card debt leads US consumers to search for a debt solution that genuinely works. Whilst some turn to debt settlement plans, others prefer the full court protection that chapter 13 bankruptcy provides. Individuals with non-exempt assets, such as rental properties, regularly choose to restructure their credit obligations over a 3 to 5 year period in order to reduce monthly payments. Whilst FICO scores will be adversely affected, it is possible for those with serious money problems to become debt-free.
The Difference Between Chapter 7 and Chapter 13 Bankruptcy
The principal difference between chapter 7 and chapter 13 bankruptcy is that the latter allows a consumer to keep non-exempt assets. A consumer would be expected to hand over any assets to a trustee if filing for bankruptcy under chapter 7 bankruptcy. Others seek chapter 13 protection with respect to home, car and student loans. In order to benefit, debtors are expected to make monthly payments towards the amount owed to creditors.
How Long Does it Take to Clear Credit Card Debt?
Depending upon the amount owed, chapter 13 bankruptcy (also known as wage earner bankruptcy) will allow a consumer to 'restructure' credit card debt over a period of 3 or 5 years. Monthly payments will be made to a bankruptcy trustee based upon the amount of disposable income available. Once this debt solution is complied with, any remaining liabilities are written-off and the consumer will now be completely debt-free.
Does Writing-Off Credit Card Debt Affect FICO Scores?
Filing for bankruptcy affects FICO scores for up to 7 years. The ramifications of chapter 13 bankruptcy are less serious than chapter 7 because creditors are receiving a regular monthly payment based on the amount of credit card debt owed. Provided repayments on other credit commitments are made punctually, FICO scores will start to improve after only a couple of years. Borrowing money will be more difficult, but mortgage refinancing will still be possible.
The Rising Cost of Chapter 13 Bankruptcy
Robert M. Lawless, a professor at the University of Illinois, conducted an analysis of court records. He claimed that, whilst 30 per cent of those filing for bankruptcy chose chapter 13, this number rose to almost 40 per cent in November 2007. This appears to be the primary reason for the increasing cost of insolvency. According to an article in The New York Times, Judge Markell stated the fee in Las Vegas, Nevada is now approximately $4,300. It was just $2,700 before changes to bankruptcy laws took place in 2005.
Chapter 13 bankruptcy may provide a better debt solution than a debt settlement plan for a consumer seeking to eliminate credit card debt. Money problems are eased because it provides a debtor with a restructured, affordable repayment plan. This affects FICO scores, but the implications aren't as serious as filing for bankruptcy under chapter 7.
Sources
Birnbaum, Jane. (Jan 12, 2008). "Law makes debt relief harder for homeowners." The New York Times
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
Comments