Chapter 13 Bankruptcy

Chapter 13 bankruptcy in a nutshell

Chapter 13 essentially permits the bankruptcy trustee and creditors to require you to complete an aggressive repayment plan to satisfy your reorganized debts. You have a better chance of protecting your home from creditors. The same goes for your car — in fact, a plan may require you to prepay future monthly payments on your car, saving you interest costs. As with Chapter 7, filing for Chapter 13 bankruptcy triggers an automatic stay against creditors’ efforts to collect the debts you owe them, including wage garnishments, foreclosure actions and car repossessions that may be under way. Of course, once the repayment plan goes into effect, there will be one garnishment you still have to endure — the payments that go your Chapter 13 repayment plan.

Most debts cannot be erased through Chapter 13 bankruptcy

In Chapter 7 bankruptcy, your unsecured debt is written off, as may be all of your remaining home mortgage. In Chapter 13, you continue to shoulder all your debts, though the terms of your loans may be rearranged to make repayment easier. Debts for which you remain obligated include:

As noted, some of these debts may be renegotiated or rescheduled. Your bankruptcy trustee and creditors work with you to develop a repayment plan that will last for a three- to five-year period. The plan anticipates applying all of your disposable income to repaying your debt. At the end of the repayment period, you may be excused from any remaining unsecured debts, but you will still be responsible for your secured debts.

How Chapter 13 bankruptcy differs from Chapter 7

Chapter 13 is similar to Chapter 7 in that you must submit your prior six months’ income, minus certain expenses, to a means test. And as with Chapter 7, you will need to complete both a debtor education course and a credit counseling course.

Chapter 13 differs in that you are required to you attend a creditors meeting, conducted by your trustee, where you will need to explain why you need Chapter 13 protection, enumerate all your debts and answer any creditor questions.

Chapter 13 bankruptcy is a good solution for those deep in debt but who have income and do not want to give up assets like their home, car and business. If you have substantial equity in your home and you want to keep it, Chapter 13 is usually the way to go. Chapter 13 can help you fend off foreclosure or stop back taxes from accruing more interest in penalties.

Some reasons to file Chapter 13 bankruptcy include:

• Possibly negotiable debts
• Protection from collection efforts such as wage garnishments, foreclosure actions and car repossession during the repayment plan
• Creditors may be separated by class, so cosigned debts can be treated differently from individual obligations
• A plan that aims for full repayment makes cosigners immune to creditors’ collection efforts
• A Chapter 13 filing can look better on your credit record than a Chapter 7
• You can file for a Chapter 13 again after just two years
• If you previously filed for a Chapter 7, you can file for a Chapter 13 within four years

Some reasons not to consider filing for Chapter 13 include:

• “Disposable” income from your paycheck will be committed to your aggressive repayment plan over the next three to five years.
• Your debt cannot exceed $1 million.
• A Chapter 13 filing costs more than a Chapter 7 — you will have to pay the trustee for administering your repayment plan.
• Your credit reports will carry mention of your bankruptcy for up to 10 years.