Chapter 13 bankruptcy allows an individual to repay all or a majority of his/her debts through a payment plan approved by the Bankruptcy Court. Instead of paying all of their creditors directly, the debtor pays a certain amount every month to the Chapter 13Trustee and this Trustee distributes the money to the creditors, as provided in the Chapter 13 plan. When the last payment is made, the debtor is no longer liable for the remainder of his or her dischargeable debts.
A Chapter 13 plan generally lasts between three and five years, depending on the amount of the debt, the ability to pay, and the specifics of the Chapter 13 plan (unless all debts can be paid off in less time).
Chapter 13 is the preferred choice for a person who wishes to repay some or all of their unsecured debts, and whose income is sufficient to allow them to do so in a reasonable amount of time. In addition, if the debtor has a considerable amount of non-exempt (unprotected) property or a great deal of exempt property used as security for some debts, this property could be lost in a Chapter 7 case and so a Chapter 13 may be the preferred choice. Other types of debtors who might opt for Chapter 13 over Chapter 7 are those whose debts might not be discharged under Chapter 7, and those with one or more large debts that may be dealt with only inside a Chapter 13 case (for instance, co-signed debts where protection from the creditors/collectors is needed for a non-filing co-signer). Often called the “Wager Earner’s Plan”, Chapter 13 bankruptcy is not limited just to wage earners. People who receive regular retirement income, child support, social security income, rent or disability income may also file a Chapter 13 case. An individual may qualify to file Chapter 13 as long as they have a regular source of income of any kind.
Normally, when calculating a restructuring plan for a Chapter 13, the attorney will start with the monthly income of the client (all sources, including spousal income), and subtract what is needed each month for food, clothing, utilities, insurance, and the other essential living expenses. Generally, what’s left over is divided up among the creditors. Note: This is somewhat of an oversimplification, but one designed to show in the most general of terms what a Chapter 13 does.
The attorney will prepare a debt repayment proposal (the Chapter 13 Plan), which gets sent to all creditors and the Chapter 13 Trustee once the bankruptcy case gets filed. In the 3 months or so that follow, the Trustee and the creditors will examine it and can file objections to the proposal based on several factors, including feasibility, treatment of their claims, lack of the debtor’s best effort to repay, and more. Once these objections are resolved, the revised proposal can be approved by the Bankruptcy Court Judge in an “Order Confirming Plan”, and the initial debtor proposal officially becomes the Chapter 13 Plan. This is an important document and dictates much of what rights, responsibilities and expectations all parties will have over the years to come.
The goal of Chapter 13 is to let people propose a longer term plan to reduce debt , fix a poor financial situation with little risk, and get your financial life totally back on track. Under Chapter 13, individuals create a payment plan under which reduced debt is repaid slowly, over time, often at pennies on the dollar.
Consider Chapter 13 if:
- You are behind on your home mortgage
- You are behind on your car payments
- You had an income interruption and now need chance to catch up
- You would like to try to pay back some money to your creditors
- You need to file for bankruptcy but do not qualify for a Chapter 7 case
- You have assets that you do not want to risk losing
- You have tax debt of any kind that you need help resolving and fixing permanently
- Monthly student loan payments are overwhelming you.
- Income tax debt is bringing you down and you need help dealing with it