What Is Chapter 13 Bankruptcy?
Chapter 13 is a consumer debt reorganization. This allows debtors to restructure payments by combining many debts into their "plan" and paying ONE monthly payment to the Chapter 13 Trustee for all the debts included in the plan. Regular mortgage payments continue to be made directly to the creditor "outside" the plan. Thus, if you have mortgage arrears, the arrears CAN be included in the plan, but the future payments due under the loan must ALSO be made separately. The debtor keeps his property and makes payments to the trustee out of future income to pay all or a portion of his debt over the life of the plan.
Chapter 13 is usually appropriate for people who have fallen behind on secured loans (such as cars or houses) and need to catch up before repossession or foreclosure. It may also be appropriate when someone has non-exempt property that cannot be protected in a Chapter 7 bankruptcy, or if someone has sufficient disposable income to pay a significant portion of their debt over time. Many factors go into determining if a debtor qualifies for or should pursue a Chapter 13 filing.
In Chapter 13, even though a debtor keeps his property, called "exempt property". Exempt property is still used to determine if a "plan" complies with the Bankruptcy Code. Creditors are entitled to receive at least as much through the Chapter 13 plan as they would have under a Chapter 7 liquidation. Hence, a debtor's payments into a Chapter 13 plan must provide at least as much to creditors as they would have received through liquidation in Chapter 7 of non-exempt property.
The Repayment Option
Chapter 13 bankruptcy often provides relief for people who have faced short-term financial setbacks like job loss, illness or large unexpected expenses.
For people who have fallen behind on their bills but have regular income, filing bankruptcy under Chapter 13 may allow the breathing room they need to get back on track with their payments and keep their property.
Many people looking to stop foreclosure or avoid repossession file Chapter 13 bankruptcy because it allows them to catch up past due payments over a period of three to five years while keeping current payments up to date.
When a person officially files Chapter 13 bankruptcy, they typically receive the protection of the automatic stay, which is a court order that prohibits further collection efforts from creditors.
That means the calls stop and most legal action (like foreclosure, repossession, lawsuits or wage garnishment) is ceased. Sound like what you're looking for?
Think About it This Way
Often, people find Chapter 13 bankruptcy helpful when:
- They are behind on payments on secured property that they want to keep. Many people file Chapter 13 bankruptcy petitions specifically to stop foreclosure or vehicle repossession, but Chapter 13 may be equally useful for catching up on other secured debts while keeping the property that secures the debt.
- They have tax debts that cannot be discharged in a Chapter 7 bankruptcy case. Certain tax debts are allowed to be discharged but some may be included in a Chapter 13 repayment plan and paid over time.
- They have non-exempt property that they want to keep. In a Chapter 7 bankruptcy case, non-exempt property can be liquidated (sold) for the benefit of creditors, but in a Chapter 13 repayment plan, the debtor maintains his or her property while making scheduled payments.
- They have filed for Chapter 7 bankruptcy within the previous eight years, and thus are not eligible to file Chapter 7.
- They wish to protect co-signers on certain debts. In a Chapter 7 bankruptcy case, a co-signer remains liable for a debt even if that debt has been discharged for the primary debtor. However, if a debt is included in a Chapter 13 repayment plan, the co-signer is protected so long as the debtor complies with the plan.
- They have past-due student loan debt. Student loans are not allowed to be discharged in a Chapter 7 bankruptcy case except under certain very narrow circumstances, but some student loan debt may be included in a Chapter 13 repayment plan.
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