Should Your Chapter 13 Repayment Plan Be 5 Years Or 3?

Chapter 13 bankruptcy differs from what many people think of as bankruptcy — the liquidation and one-time sale of your assets — by including a repayment plan for eligible debts. And when you choose Chapter 13 bankruptcy, you face one of two time frames: either a three-year plan or a five-year plan. Which should you choose? And can you change your mind? Here's what every debtor needs to know. 

Why Choose a Three-Year Plan?

In general, debtors whose income falls below the median income for their state may choose a three-year repayment term. This has two advantages. First, it's a shorter time commitment, meaning you may have an easier time completing it and you'll receive the discharge of remaining debts sooner. It also often results in a lower overall repayment than a longer plan. 

Why Choose a Five-Year Plan?

If your income is above the median in your state, you usually have to choose a five-year repayment plan. However, what if you qualify for both a three- and a five-year plan? Some debtors opt for the longer term in order to have smaller monthly payments — even for a longer period.

For instance, a three-year plan with $500 monthly payments pays off the same amount of debt as a five-year plan with $300 payments. Sometimes, the longer term length may result in more overall debt being repaid. But if you get more budgetary wiggle room with a lower payment, this may be a beneficial sacrifice. 

Why Change Your Plan Length?

Of course, no one can see into the future. What if your financial situation changes before your payment plan is complete? The good news is that bankruptcy law recognizes that this happens sometimes. So you can often choose to change your term length during your open case. 

If your income falls, for example, you may qualify for a three-year plan and be able to reduce the total repaid. However, what if you opted to keep a secured asset (like your home) but can't keep up with both arrearages and current payments? You may choose to give up the asset and switch to either a shorter-term or Chapter 7 bankruptcy. 

Where Should You Start?

There are reasons to opt for both three-year repayment plans and five-year plans. Which is right for you? Start by learning more about your specific case in consultation with a qualified bankruptcy law group in your state today.

Contact a chapter 13 bankruptcy law group in your area to learn more.