Today's post is about the abuses and pitfalls of chapter 13 bankruptcy.
But before we can do that, there is one thing we must ask...What exactly is chapter 13 bankruptcy and what makes it different than chapter 7?
Well simply put, chapter 13 bankruptcy is more of a consumer consolidation of commercial debt, while chapter 7 is a complete clearing of debt (with a caveat).
Chapter 13 bankruptcy allows you to often keep a car you may be a few payments behind on, as well as a house that may otherwise be subject to foreclosure. Chapter 13 (in essence, and when applicable) can lower how much you pay on your overall consumer debt, while divvying up one average monthly payment to any other debts that are capable of being taken back(of course subject to some limitations).
So chapter 13 isn't a complete elimination of your debts, its a debt repayment plan put in place to help people clear themselves, while still being held responsible for their mandatory debts.
It is widely known, and has been written about in many newsletters and legal outlets that chapter 13 has been used as a predatory measure by some firms in certain low income communities. Chapter 13 takes a bit more work than a chapter 7 bankruptcy, which of course results in higher fees to the clients (its just the nature of chapter 13). It is also common knowledge that for most people who attempt a shot at chapter 13, they will fail to make their payments for the entire term (3-5 years) of the bankruptcy, which often results in an upfront payment of high legal fees for attorneys, with very little results for the pay off of client's debts....which puts them in an endless cycle of debt and pointless payouts of legal fees. It is a sad reality, but a true one. However, often times, many consumers have no choice but to resort to these predatory ways as a means to buy more time before their car gets repo'ed, or before their house gets sold at auction.
With that being said, Chapter 13 can be a God send, as well as a helpful financial tool....but typically this will require a larger down payment up front than most low income people believe they can afford. In short, most times taking making a 1300 dollar down payment, for a total payment of 2600 in legal fees, is much better than 0 down, and subsequently having to carry the burden of paying over 4-5k in just legal fees.
My suggestion as an attorney, but also as a budgeting diva is think of a down payment in legal fees, the same as your would think of a down payment on a house. Yeah, that 0% down on a house sounds good today, but that extra 10-30k that you will pay in interest over the next few years will make you pray that you made that down payment up front!
I hope this helped ya'll!
Stay safe out there!