What is Chapter 13 Bankruptcy?

Chapter 13 is a little different than Chapter 7 Bankruptcy. A Chapter 7 Bankruptcy typically “wipes out” your debt.  With a Chapter 13 Bankruptcy, you may have to pay back a portion of your debt over a period of time.

Chapter 13 is often preferred over Chapter 7 because it typically allows you to protect your property and assets.  With a Chapter 7 Bankruptcy, your assets may be liquidated as a means of repaying some of your debt.  Chapter 13 doesn’t require you to do this as Chapter 13 is more of a way to restructure or “reorganize” your debt so that it is more manageable.

Chapter 13 also provides a great opportunity to bring past due mortgage payments current, to pay recent tax debts in full, or to catch up on unpaid child support obligations.

Who is eligible?

Chapter 13 is often called the “Wage Earner’s Plan” because the eligibility for Chapter 13 is not determined by income. Chapter 13 is an option for individuals, couples, and sole proprietors (not corporations) who are struggling financially regardless of income.  That said, since Chapter 13 requires that you repay a portion of your debts, you will have to prove to the court that you have enough income to support your payment obligations.  If you don’t have sufficient income, you may not be eligible to file for Chapter 13 and will have to explore other options like Chapter 7.

 How does Chapter 13 Bankruptcy Work?

Chapter 13 is basically a way for you to restructure or reorganize your debt so it is more manageable.  After filing the necessary paperwork, you’ll be appointed a trustee who will oversee your case.  He or she will work with you and your creditors to come up with a repayment plan.  Creditors can make objections to your plan, but ultimately a judge will decide if your plan meets the requirements of the bankruptcy code.

Can I keep my assets?

Because Chapter 13 allows you to save your home and potentially some other assets, many people pursue Chapter 13 over Chapter 7.  With that said, Chapter 13 requires you to agree to a repayment plan.  If you can’t make the payments agreed upon in this plan your case may go back to court.  At that point, your home and other assets could be leveraged as a way to pay back your debts.  So, while Chapter 13 keeps your assets safe initially, if you fail to follow through with your end of the agreement, they could be in jeopardy.

What do I need to do in a Chapter 13 Bankruptcy?

To get started, you would need to file the required documents with your local bankruptcy court.  You’ll need to include information about all your assets and all your debts.  They will also want to know about your income and overall monthly expenses.  If you file for Chapter 13, you must attend credit counseling from an approved agency within 6 months of filing.

After this initial filing, you’ll need to file a repayment plan.  Most of the time the payments required to be paid with a Chapter 13 plan are substantially smaller than if the debtor made payments to the creditors directly.  This is in part because the creditors will not be paid with the contract and/or default rate of interest.  Quite often the unsecured creditors will not be paid any interest.

Learn more about living with your Chapter 13 plan.

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