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What Happens to Debt When You File for Chapter 13 Bankruptcy?

by

JG Wentworth

July 12, 2024

8 min

Chapter 13 Bankruptcy Paperwork

When crushing debt feels inescapable and collectors are closing in from every angle, filing for bankruptcy can seem like the only emergency exit ramp left to take — an opportunity to finally slam the brakes and reorganize before your finances careen off a cliff. 

But not all bankruptcy filings are created equal. While Chapter 7 bankruptcy involves surrendering many assets to satisfy debts, Chapter 13 allows you to hang onto property while reorganizing those burdensome balances into a manageable repayment plan. 

So exactly what happens to all those looming bills, interest charges, and creditor headaches once you pull the Chapter 13 ripcord? While it’s not a full “get out of debt free” card, this branch of bankruptcy does provide some powerful debt reorganization and enforcement capabilities. 

This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions. 

An automatic stay freeze on collections 

One of the very first impacts of filing Chapter 13 is hitting pause on the dizzying cycle of debt communications, threats, and judgments against you. 

Thanks to the powerful “automatic stay” provisions, the second your case is filed, creditors must immediately cease all collection efforts, harassment, letters, calls, lawsuits, repossessions, foreclosures, wage garnishments – everything gets locked down. This line of defense provides critical breathing room to organize next steps. 

 

A consolidated chapter 13 repayment plan 

Though not a total liquidation of everything you owe, Chapter 13 does require proposing and adhering to a rigid court-approved repayment plan lasting 3-5 years. The amount you’re on the hook for repaying each month gets determined by factors like: 

  • Your total disposable household income after reasonable living expenses. 

 

  • Value of non-exempt assets and property you want to retain. 

 

  • Total outstanding balance and types of debt included in reorganization. 

 

By rolling multiple credit cards, loans, back payments, etc. into one structured repayment schedule based on your provable ability to pay, Chapter 13 helps rein in the chaos of juggling countless minimum payments. You prioritize paying what you can reasonably afford on a predictable timeline. 

The mandatory credit counseling component also teaches skills to prevent future debt troubles once the bankruptcy reorganization concludes. 

 

Leverage to potentially modify contracts 

One of the biggest advantages of Chapter 13 is enabling judges to unilaterally modify terms and contractual agreements with certain creditors to ease repayment burdens. 

For example, interest rates on unsecured consumer debts like credit cards can potentially get drastically reduced or even frozen at 0% if the court finds current rates too onerous. The bankruptcy system essentially dictates the new terms lenders must legally abide by during the repayment window. 

On the flipside, mortgages and car loans remain mostly intact but you can cure or catch up missed payments through the structured repayment. 

 

Discharge of certain debts post-completion 

While not wiping the slate entirely clean like Chapter 7, Chapter 13 does eliminate certain remaining debts once the repayment plan is satisfied in full. 

This can include discharging portions of unsecured obligations like credit card balances, personal loans, medical debts, and certain older tax debts or civil judgments that weren’t paid off during the term. 

For the numbers-driven, according to statistics released by the Administrative Office of the U.S. Courts, annual bankruptcy filings totaled 433,658 in 2023, compared with 383,810 cases in the previous year. It remains one of the most common pathways to managing unmanageable debt through a revised payment system, limitations on collections, and judicial enforcement of creditor terms. 

However, this branch of bankruptcy does linger on credit reports for 7-10 years while you slowly rebuild. And not all debts may qualify for restructuring or discharge depending on types and amounts owed. 

 

In summary 

  • Chapter 7 provides a fresh start by liquidating assets to discharge debts. 

 

  • Chapter 13 keeps assets but requires repaying creditors through a multi-year court-approved plan. 

 

So, Chapter 7 is a traditional bankruptcy liquidation, while Chapter 13 is a reorganization of debts into an affordable repayment structure. And while Chapter 13 can be an invaluable lifeline for debtors legitimately unable to tread water, it requires diligently completing a multi-year repayment commitment while sacrificing full debt elimination found in Chapter 7 filings. An imperfect solution for sure, but often better than allowing debt to completely torpedo your financial future. 

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Need some relief? 

If you’re considering filing for bankruptcy because you don’t see any viable path to resolving your debt, give JG Wentworth a call to speak with one of our dedicated debt relief specialists. If you have $10,000 or more in unsecured debt, you may be eligible for our Debt Relief Program.* Some basic perks to consider: 

  • One monthly payment 
  • We negotiate on your behalf 
  • Average debt resolution in as little as 48-60 months 
  • 24/7 support 
  • We only get paid if we settle your debt 

 

If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side helping you every step of the way? 

 

SOURCES CITED 

Bankruptcy Filings Rise 13 Percent.” UScourts.gov. October 26, 2023. 

*Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required. 

Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment. 

JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy

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