There is legal protection for you when filing for a Chapter 13 bankruptcy, which is also known as a wage earners repayment plan. Statistically, the failure rate of Chapter 13 repayment plans is extremely high and approximately 75% of all Chapter 13 bankruptcy cases fail and the client ends up in a Chapter 7 bankruptcy case. This is unfortunate because as with a voluntary non-bankruptcy repayment plan, the fees in a Chapter 13 are expensive. Usually the chapter 13 bankruptcy attorney fees average around $4,000. Chapter 13 debt consolidation repayment plans generally take three (3) to five (5) years to complete.
Oftentimes a client loses his or her job and can not make the payments, or, more commonly the client simply could not afford to make the Chapter 13 debt consolidation payments to begin with so the case is either converted to a Chapter 7 bankruptcy case or it is dismissed and the client has to pay attorney fees and court costs again.
Unfortunately some law firms do not properly explain to client that in a Chapter 13 debt consolidation repayment plan that the payment is not based on what the client can afford to pay. Rather, just like a voluntary debt consolidation bankruptcy, the client must be able to afford the payment in order to stay in the program. This is not to say that there are not good legal reasons that justify filing a Chapter 13 debt consolidation bankruptcy.
A factor to consider whenever one is thinking about filing a Chapter 13 debt consolidation bankruptcy or whether to attempt a voluntary debt consolidation program is the self-interest of the bankruptcy lawyer or debt consolidation management company. For example, there are some bankruptcy law firms that will steer clients toward a Chapter 13 debt consolidation repayment plan because the law firm makes more money on a Chapter 13 case.
The fees associated with a voluntary debt consolidation program must also be examined closely, especially if the company is requiring that fees be paid to the company prior to the time the debt consolidation program has actually been accepted by all of your creditors.
Sometimes there is no option for a client but to file a Chapter 13 debt consolidation bankruptcy. This typically involves a situation where the client has fallen behind in their mortgage payments and needs more time to catch up the payments. If such a Chapter 13 debt consolidation bankruptcy plan is approved by the court, the client is still obligated make the current mortgage payments as they become due after the case has been filed, if they don’t they could end up in a foreclosure bankruptcy situation.
A voluntary non-bankruptcy debt consolidation plan will not assist a client who has missed their mortgage payments, so the only alternative may be a Chapter 13 debt consolidation plan.
Chapter 7 bankruptcy is not a debt consolidation bankruptcy. Rather, it is a bankruptcy proceeding in which many if not all of the client’s debts are legally wiped out. If a client is behind on a mortgage payment Chapter 7 bankruptcy will stop a foreclosure just as Chapter 13 debt consolidation bankruptcy would, but the creditor will file a motion in bankruptcy court called a Motion For Relief From Automatic Stay so that they can obtain court permission to foreclose on the property.
In more recent times, however, mortgage companies have been more receptive to doing loan modifications for clients who are in a Chapter 7 bankruptcy proceeding even though Chapter 7 bankruptcy is not a debt consolidation bankruptcy. In fact, in years past if a client were behind on their mortgage payments, the client would have to file a Chapter 13 debt consolidation bankruptcy in order to save the home.
Moreover, mortgage companies are unwilling to enter into a loan modification with a homeowner prior to a client filing Chapter 7 bankruptcy, but once the Chapter 7 bankruptcy case has been filed, the tables are turned and many times the mortgage company will then discuss favorable modification terms with the homeowner.
Therefore, based upon the current economic climate and the fact that banks have a significant amount of inventory on their books, strong consideration should be given to filing a Chapter 7 bankruptcy instead of a debt consolidation plan, especially if the consumer is a homeowner.