The impact will vary depending on how recently the bankruptcy occurred and how many debts were discharged.
"The more accounts, the more impact," says Ulzheimer. As the bankruptcy gets older, even though it remains on the report, the "impact will diminish," says Ulzheimer.
Also known as debt adjustment, Chapter 13 allows individuals, not corporations, to temporarily halt foreclosures and collection actions while they draft and execute a plan to repay some or all of the debts over a three- to five-year period.
One of the biggest benefits for Chapter 13 filers is that the amount you're going to have to pay on that debt will depend not on how much you owe but on how much you have -- your regular income, hence the nickname "wage earner's plan."
"In many cases, if you are behind on your mortgage or your car loan, and you don't think you can catch up quickly, you file a Chapter 13," says Sommer, author of "Consumer Bankruptcy: The Complete Guide to Chapter 7 and Chapter 13 Personal Bankruptcy." "That's probably the No. 1 reason people file Chapter 13."
This type of bankruptcy lets you reschedule and extend secured debts over the life of your Chapter 13 plan.
Chapter 13 differentiates between three types of debt:
- Priority debts, which often include some taxes and child support, have to be paid in full.
- Secured debts, which are debts secured with some form of collateral, must be paid up to at least the value of the collateral, and in some cases, up to the total amount of debt.
- Unsecured debts, like credit cards, typically receive just a percentage of the total due. "The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected 'disposable income' over an 'applicable commitment period,' and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under Chapter 7," says the Administrative Office of United States Courts.
With a Chapter 13 bankruptcy, you must be under the allowed debt limits. As of April 2005, it's $307,675 of unsecured debts -- such as credit card debt and medical bills, not tied to an asset -- and and $922,975 of secured debt -- those tied to an asset that can be repossessed or foreclosed upon, such as a house or car. The limits change April 1 each year.
Debt owed to a single creditor totaling more than $500 for luxury items bought within 90 days of filing are non-dischargeable; cash advances of $750 within 70 days are also non-dischargeable.
New, tougher laws
Once again, however, new bankruptcy laws will toughen a debtor's ability to qualify.
For instance, if a debtor's income is greater than the state median income, they have to establish a five-year repayment plan where they have to pay a certain amount of money to creditors. This amount is based on a strict allowed expenses-to-income formula. The allowed expenses -- not actual expenses -- are set each year by the IRS collections department. On the anniversary date of a confirmed plan, they must file a new statement of income and expenses.