Chapter 13 bankruptcy offers many benefits to you and your family if you are drowning in debt. As soon as you file, an automatic stay goes into effect that protects you from creditor lawsuits. In addition, Chapter 13 bankruptcy can help you lessen your debts and make them easier to manage. Before you file for Chapter 13 bankruptcy, however, you must consider the finer points of what this form of bankruptcy entails, and decide if the lifestyle change it requires is something you can live with.

You Must Repay Your Debts

Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy does not offer debtors the ability to escape their debts altogether. Together with your attorney, you will be expected to propose a repayment plan to the court. Your repayment plan must span a three to five year period and allocate the majority of your disposable income toward your debts.

In many cases, the court may reduce your debts significantly by disposing of interest charges and fees or reducing your balances. Doing so, however, is not required. If you are financially able to pay off the full amount you owe within a three to five year period, the bankruptcy court is likely to demand that you do so. If paying off the full amount you owe is impossible within a three to five year period, the court will discharge your remaining debts after you have completed the terms of your repayment plan.

You Must Live on a Limited Income

The bankruptcy court will expect you to put all of your spare income toward paying off your debts. If your income increases, you must immediately notify the bankruptcy trustee in order to have your repayment plan modified. You will also be expected to provide the bankruptcy trustee with copies of your tax paperwork each year that you are involved in a Chapter 13 bankruptcy. If you are anticipating a tax refund, expect the court to direct that refund toward your unpaid debt.

Many individuals find it difficult, if not impossible, to live by the strict guidelines that the bankruptcy court imposes. For a three to five year period you will be forced to live as frugally as possible. Small luxuries you once enjoyed, like a dinner out, will become things of the past. Consider carefully if you will be able to adhere to the repayment plan before you file for Chapter 13 bankruptcy. Failure to adhere to the repayment plan will result in your bankruptcy being dismissed. Should this occur, your creditors are then free to sue you for the remaining amount that you owe. Unfortunately, the majority of debtors who file for Chapter 13 bankruptcy are unable to stick to their repayment plans.

Your Credit Will Suffer

Some individuals are under the mistaken impression that by filing for bankruptcy, the bankruptcy itself will appear on their credit reports, but their old debts will vanish. Unfortunately, this is not the case. Any debts you have that are included in a Chapter 13 bankruptcy will appear on your credit report for their full reporting period. The only change that will occur is that your previously outstanding debts will reflect the notation, “included in bankruptcy”.

The Chapter 13 bankruptcy itself will appear on your credit report for seven years as well. The reporting period begins as soon as you file. Should your bankruptcy be dismissed for any reason, it will continue to reflect on your credit report for the duration of the reporting period. A bankruptcy is an extremely derogatory notation to have on your credit report, and you can expect your credit score to drop considerably as soon as it appears within your file.

The benefits of a Chapter 13 bankruptcy only outweigh the disadvantages if you are diligent and can stick to your repayment plan. Most individuals who file for bankruptcy do so with the hope of getting relief from their debts. Although a Chapter 13 bankruptcy can grant you legal protection, you won’t get the relief you seek until your repayment plan is complete.