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What are the advantages of Chapter 13 bankruptcy?

Chapter 13 bankruptcy, also referred to as the wage earner's plan, gives debtors the ability to create a customized repayment plan to pay back all -- or at least part -- of their outstanding debts. Generally, people who participate in Chapter 13 bankruptcy are given a period of between three and five years to pay off their debts. If the applicants' monthly income is over the state median, then the repayment plan will be for five years, but never for more than that.

One of the main advantages of Chapter 13 protection is that it prevents creditors from seeking repayment through debt collection efforts during and after the bankruptcy process. That means that debtors can get immediate relief from harassing and embarrassing phone calls to collect debts.

In comparing Chapter 13 to Chapter 7, Chapter 13 offers several other distinct advantages. For one, Chapter 13 allows debtors to prevent their homes from being foreclosed. The bankruptcy process can also help them cure overdue home payments. That said, any new mortgage payments that come up during the bankruptcy must also be paid. Chapter 13 also allows debtors to reschedule their secured debts that do not relate to their primary residences, and extend them across the timeframe of the bankruptcy.

Another advantage is that Chapter 13 offers protection to third parties who are also liable for your consumer debts -- for example, co-signers on your credit cards and/or other loans. In essence, Chapter 13 functions kind of like a consolidation loan that distributes a monthly lump-sum payment to creditors. Best of all, debtors will not have to contact their creditors directly, as this will all be handled by the Chapter 13 trustee.

Source: US Courts, "Chapter 13 - Bankruptcy Basics," accessed Oct. 09, 2015

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