Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows individuals to reorganize their debts through a payment plan and is for people with regular income. A chapter 13 plan is known as a “wage earner” plan, but a person’s income only needs to be regular and does not necessarily need to be wages. Like chapter 7, chapter 13 also provides a fresh start from unsecured debts such as credit cards, medical bills, personal loans, and most civil judgments.  Those who file chapter 13 propose a payment plan and make payments to a court-appointed trustee for a period of three to five years. In some cases, however, the payment plan can be less than three years. Debtors usually receive their bankruptcy discharge shortly after completing the payments on a confirmed chapter 13 plan which ends their personal liability on most debts.

Chapter 13 vs. Chapter 7

Chapter 13 has important advantages over chapter 7. Like chapter 7, debtors in chapter 13 may choose to surrender collateral they no longer wish to keep to a secured lender in order to free themselves of the monthly payments and to discharge their personal obligation on the loan.  But unlike chapter 7, debtors in chapter 13 generally keep all of their property that they own free and clear of liens and this property is not subject to liquidation by a court-appointed trustee.  For this reason chapter 13 is often more appropriate for debtors who own property of value that they cannot afford to lose, such as a small business or a valuable automobile that is paid off.  Other important advantages of chapter 13, which are highlighted below, are powerful tools to deal with secured debts, such as mortgages, condominium association liens and automobile loans.

Benefits of Chapter 13

In exchange for a commitment to make a good faith payment each month for three to five years to pay one’s creditors, the bankruptcy code gives debtors in chapter 13 several benefits.  Among other benefits available, chapter 13:

• Stops garnishments, harassment, lawsuits, repossessions, and foreclosures quickly.

• Allows you to keep your home and have up to 60 months to pay missed mortgage payments.

• May eliminate second mortgages and other subordinate liens on sufficiently “underwater” property. This can be very beneficial to homeowners because the elimination of a second mortgage or secondary lien may reduce the total amount owed on a property enough to make an “underwater” property become much less “underwater” and financially worth keeping.

• Allows you up to five years to pay off taxes, often with no further interest or penalties.

• Allows you to keep collateral on secured loans, such as a car, furniture, or major appliances, and pay the loans through the  chapter 13 plan. You can often pay only what the collateral is presently worth and at a reduced interest rate, rather than what is owed on the loan.  This is known as “cramming-down” property.

Although the benefits and the relief provided by chapter 13 bankruptcy can be substantial, chapter 13 is one of the more complex areas of consumer bankruptcy law.  The chapter 13 plan proposed by a debtor must meet the many requirements under the bankruptcy code and must be confirmed by the bankruptcy court.  For this reason it is important to consult with an experienced bankruptcy attorney, and one who is experienced in both chapter 7 and chapter 13, which are the two most common types of personal bankruptcy.  Also, filing for bankruptcy under a chapter that does not best suit your situation and your goals can be costly.