Individuals facing overwhelming debt often see bankruptcy as a last resort, and Chapter 13 bankruptcy is one of the options available. However, several common misconceptions surround Chapter 13 bankruptcy.
These misunderstandings can lead to confusion and anxiety.
False: You will lose everything
One of the most prevalent myths is that filing for Chapter 13 bankruptcy always means giving up all your assets. In reality, Chapter 13 is a reorganization plan, allowing many people to keep their property while repaying debts over time.
False: It is a sign of financial failure
The notion that bankruptcy signifies financial failure is a gross misperception. Life’s turns, such as exorbitant medical expenses or unexpected job loss, can propel anyone into financial adversity. Chapter 13 offers an organized avenue for regaining fiscal sovereignty.
False: You can wipe out all debts
Chapter 13 bankruptcy does not eliminate all debts like a magic wand. Instead, it orchestrates a debt repayment regimen tailored to your income and asset portfolio. The repayment plan may require you to pay back a portion of your debt.
False: It ruins your credit forever
While Chapter 13 undoubtedly leaves an imprint on people’s credit ratings, it does not etch an indelible scar. Many people start rebuilding their credit soon after completing their repayment plan. Chapter 13 is a step toward a fresh financial start.
False: You can always choose Chapter 7 instead
Some people believe they can simply switch between Chapter 13 and Chapter 7 bankruptcy. In reality, eligibility for Chapter 7 depends on your income and assets. Meanwhile, any person, even self-employed, can qualify for Chapter 13 as long as total secured and unsecured debts are less than $2,750,000. Chapter 13 might be the only option for some.
False: All debts receive equal treatment
Chapter 13 distinguishes between different types of debt. Priority debts, such as taxes and child support, demand full repayment, while unsecured debts may only receive a portion of the amount owed.
False: It is a quick fix
Chapter 13 bankruptcy is not a swift solution. The repayment plan typically lasts three to five years, during which you must adhere to your commitments diligently.
False: You can hide assets
Trying to hide assets is a bad idea. Bankruptcy proceedings involve thorough scrutiny, and failing to disclose assets can lead to serious legal consequences.
Also, some people harbor the misconception that they can accrue substantial debt, such as credit card debt, immediately before filing for Chapter 13. Courts may consider this behavior fraudulent and not discharge those debts.