What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is sometimes called a "reorganization" bankruptcy. Borrowers get to keep their property and must adhere to a repayment plan devised by the court. Chapter 13 gives those capable of repaying creditors with a structured plan a chance to catch up on their obligations and clear their names.
How Is Chapter 13 Different from Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is also called a "liquidation" bankruptcy. It allows debtors to keep future income but requires the dissolution of non-exempt property in order to fully or partially satisfy creditors. Chapter 13 gives creditors a claim on future income until the debts are partially or fully satisfied in accordance with the court-approved plan. Chapter 13 takes longer, is more complicated, and costs more than Chapter 7, but it allows filers to retain their property.
What Can Chapter 13 Bankruptcy Accomplish?
First, Chapter 13 is probably the only option available to those who are capable of repaying some or all of their debts. About 15% of all bankruptcy filers opt for Chapter 13. Chapter 13 allows debtors in arrears on car or home loans to make up missed payments over time and keep their vehicles and homes. It allows those having trouble paying student loans, tax obligations, or other debt that can't be discharged in Chapter 7 to pay them off over time. Chapter 13 can force creditors to "back off" and accept a court-ordered repayment plan. Chapter 13 allows debtors to protect co-borrowers or cosigners from creditors, whereas a Chapter 7 discharge by one party would leave the other on the hook for the whole amount. Chapter 13 allows filers to keep nonexempt property that would otherwise be forfeited under Chapter 7.
How Does Chapter 13 Bankruptcy Work?
Chapter 13 requires filers to prove that they earn sufficient income to repay some or all of their debts. Those with insufficient or unreliable income to repay the minimum required under a plan, or whose debt exceeds the maximum allowed by law (secured debts > $1,010,650 or unsecured debts > $336,900) will not be allowed to file. Neither will those who have not submitted their most recent four years' tax returns. Debtors must receive approved credit counseling prior to filing for bankruptcy, pay filing fees, and complete numerous forms. They will have to create a repayment plan (or have a bankruptcy attorney prepare it) for submission to the court. If the plan satisfies the court it will be approved or "confirmed."
Some obligations, called "priority debts," will have to be paid in full. These include child support, wages owed to employees, and some taxes. The plan must allocate all disposable income toward repayment--first of secured debts, then towards unsecured debt if possible. The repayment plan duration is three years for those who make less than the median income for their state and five years for those who make more. The plan ends early if debts are repaid in full. Once the plan is completed, any remaining bad debts eligible for discharge are wiped clean. Discharge also requires completion of an approved budget counseling course and proof that all child or spousal support obligations are current.
What if the Filer Can't Complete the Chapter 13 Repayment Plan?
Supposing a debtor is making payments under a Chapter 13 plan in good faith when circumstances thwart his or her efforts? The bankruptcy trustee who administers the repayment might modify the plan if the difficulty is short-term, like the loss of a job. If the situation is truly catastrophic, such as a permanently disabling illness, the court may grant a hardship discharge or allow the debtor to convert the bankruptcy filing to Chapter 7.
What Is the Best Option for Debt Relief?
Filing for bankruptcy protection is a major decision, and making the wrong choice could prove devastating financially. A bankruptcy attorney can help determine if bankruptcy is appropriate and which chapter offers the best outcome for the debtor. A bankruptcy attorney can take care of the filing forms and help create a repayment plan that will be acceptable to the court.