Chapter 13 Bankruptcy Law
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What Is Bankruptcy?
Bankruptcy is a federal court process. It is designed to help consumers and businesses eliminate debt or repay debts under the protection of the bankruptcy court. There are two categories of bankruptcy, "liquidation" or "reorganization":
- Liquidation bankruptcy (or Chapter 7) - a consumer or business asks the court to discharge the debts owed (some debts cannot be discharged). In exchange, the business's assets or the consumer's property is sold (liquidated) and the proceeds are used to pay off the creditors.
- Reorganization bankruptcy - involves filing a plan with the bankruptcy court suggesting how you will repay your debt. Some debts must be repaid in full while others require only a percentage or nothing at all.
What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
- Chapter 7 bankruptcy (straight bankruptcy) is liquidated bankruptcy
- Chapter 13 bankruptcy (repayment plan bankruptcy) is reorganization bankruptcy
An individual's debts are not discharged under Chapter 13 bankruptcy, but rather, the individual may lower his debt payments to affordable levels. He will then have a certain period of time to pay off his debt. The plan for getting out of debt is formalized and approved by the bankruptcy court. Some unsecured debt (debt that is not collateralized) may be discharged. However, if you owe more than $250,000 in unsecured debt and more than $750,000 in secured debt, you cannot reorganize under Chapter 13; you must do so under Chapter 11. To file for Chapter 13, you must have regular income and debts under those levels.
When Should I File under Chapter 13?
Chapter 13 is recommended if:
- You have debts that are not dischargeable in Chapter 7
- You are in default on mortgages or car payments
- You have more property than can be exempted under Chapter 7
- You owe taxes or other debts that are not dischargeable in Chapter 7
Important Features of Chapter 13 Bankruptcy
There are certain important things that the individual (or business) should bear in mind before filing for Chapter 13:
- Chapter 13 can be used to stop a house foreclosure, make up missed mortgage payments, and keep the house. It can also be used to pay off back taxes and stop interest from accruing on tax debt.
- Filing for Chapter 13 stops creditors from hounding you.
- Chapter 13 requires that for the entire length of your case (3 to 5 years), you will have to live under a strict budget; the court will not allow you to spend money on something nonessential.
- Most debtors never complete their repayment plans; many drop out early in the process.
- Payments may be deducted from your wages during your case. Monthly payments under Chapter 13 may be automatically deducted from wages and sent to the court.
- Chapter 13 can stay in your credit file for up to 10 years from the day you file your papers. After your case is over, you can try to improve your credit (with some bankruptcy courts establishing programs to help you do that).
Should I Consult a Bankruptcy Lawyer?
Compared to Chapter 7, Chapter 13 requires more dedication on the part of the person filing for bankruptcy. Thus, a lawyer can help you decide whether Chapter 13 is the right option for you based on what you may lose under Chapter 7.
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Last Modified: 02-18-2015 01:58 PM PST
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