Investing During Chapter 13

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Chapter 13 bankruptcy is not a complete discharge of debts; it is a restructuring of debts, often negotiating them down into a reasonable payment plan. Payment plans typically last three to five years and are overseen by a bankruptcy trustee. Follow all trustee directives regarding investments during Chapter 13.

Chapter 13 Basics

  • Chapter 13 bankruptcy is chosen when your personal estate is deemed to have enough assets and income to repay most, if not all, of the debts over a period of time. In the filing, all assets, debts and income sources must be disclosed to comply with bankruptcy regulations. Collections are stopped while under Chapter 13 with what is referred to as a "stay," a court order ceasing all aspects of the debt and collection process. The job of the trustee is to determine what reasonable payments can be made to all debtors.

Protected Investments

  • Certain investments are protected during Chapter 13 bankruptcy. In fact, homeowners may choose Chapter 13 over Chapter 7 to prevent foreclosure on a primary residence. The bankruptcy process provides time during the stay and subsequent payment program to get current on payments. Other investments that are protected are retirement savings assets. Most states grant minimum protection of $1 million on 401k or IRA assets, protecting retirement savings so the debtors doesn't become a burden to public resources at a later point.

New Investment Opportunities

  • While under the Chapter 13 bankruptcy plan, all new investment opportunities must be disclosed to the trustee for approval. The trustee reviews any changes in income and assets to determine if adjustments need to be made in the payment plan. Failure to disclose new investments may lead to seizure of the investments to repay creditors. Bankruptcy trustees understand the need to rebuild your financial future during the process; disclosure is the key aspect to not getting into trouble.

Considerations

  • It is wise to not take extreme risks with investments during the Chapter 13 process. If you don't own a home and try to purchase a home, you will most likely need a co-signer to get the mortgage. The trustee will look at the resources leading to a down payment. The debt to income ratio will be scrutinized intently. Smaller investments such as monthly mutual fund deposits might not dramatically affect your payment plan. Where red flags are raised is being able to buy thousands of dollars in high-risk stocks or private ventures.

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