Chapter 13 Bankruptcy allows a person to restructure their budget so they can begin paying off some of their debts to creditors. This is also called "reorganization bankruptcy" or "restructuring bankruptcy." With a Chapter 13 filing, the debtor can pay a percentage of some of their debts. Some debts may be discharged, while other debts must be paid off in full. This all depends on a variety of conditions and factors like:
- The type of debt involved
- The nature of the relationship between debtor and lender
- The discretion of the bankruptcy judge
What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
The difference is, at first, simple:
- 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.
If you're not sure if you should file for Chapter 7, Chapter 11, or Chapter 13, then read more about it here:
When Should I File under Chapter 13?
You should file for Chapter 13 Bankruptcy if:
- You have debts that are not dischargeable in Chapter 7;
- You have already filed for bankruptcy under Chapter 7, less than 6 years ago;
- You are in default on mortgages or car payments and would like to prevent foreclosure; and
- You have non-exempt property that you wish to keep.
There are some cons that occur with a Chapter 13 bankruptcy, including:
- It will stay on your credit report for 10 years; and
- You must give up all of your credit cards.
Important Features of Chapter 13 Bankruptcy
When filing for Chapter 13 Bankruptcy, you should be aware of some other aspects of the filing. These can often be beneficial for the debtor. For instance, filing under chapter 13 creates an "automatic stay" on any debt collection efforts. This means that your creditors can’t collect debts from you while the Chapter 13 process is being completed. Some other important elements of Chapter 13 bankruptcy include:
- Chapter 13 can potentially 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).
What is a Forced Conversion Hearing?
Sometimes the court will force a debtor to change their bankruptcy filing from Chapter 7 to Chapter 13 or Chapter 13 to Chapter 7. This is called forced conversion and usually applies in situations where the person files for chapter 7 bankruptcy but has enough money to repay creditors.
Should I Consult a Bankruptcy Lawyer?
Chapter 13 bankruptcy can be a complex process that involves many different factors. The process can also involve many different parties, such as creditors, mortgagors, and other parties. You may wish to hire a bankruptcy lawyer if you need advice regarding bankruptcy proceedings. Your attorney can provide you with legal guidance and can inform you of your rights. Also, your lawyer can be available to represent you during the formal hearings before a judge.