Chapter 13 bankruptcy is known as a reorganization bankruptcy. Instead of selling off all relevant assets to pay creditors, people who file for Chapter 13 bankruptcy set up repayment plans that use their income to gradually eliminate their debts. It's typically used by debtors whose income exceeds the limits of Chapter 7. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. However, Chapter 13 bankruptcy has its own set of rules and eligibility requirements. This section offers a guide to those rules and requirements, as well as the process involved. This section contains in-depth information about Chapter 13 bankruptcy, including the pros and cons of Chapter 13, how it differs from Chapter 7, how repayment plans work, the debts that remain after a Chapter 13 discharge, and more.
Who Can File for Chapter 13 Bankruptcy?
A debtor must meet the strict requirements to file for bankruptcy under Chapter 13. Unlike a Chapter 7 bankruptcy, which allows the debtor to discharge some debts in exchange for the sale of nonexempt property to pay creditors, Chapter 13 allows the debtor to keep their property and repay creditors in a three- or five-year court-approved repayment plan. Businesses do not qualify for debt relief under Chapter 13; only individuals or married couples.
How Chapter 13 Works
A Chapter 13 bankruptcy begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. From there, the debtor proposes a 36- to 60-month payment plan to the court to repay his/her debt. A 36-month plan is proposed to the court if the debtor's gross income is below the median income for his/her particular state. If the debtor's gross income is above the median income for his/her state, then a 60-month payment plan will be proposed to the court.
What are a Debtor's Obligations Under Chapter 13?
Debtors have a number of legally-imposed obligations when filing under Chapter 13. These include filing the required forms and documents with the local bankruptcy court in their area, paying a filing fee, making payments in accordance with the proposed repayment plan and, most importantly, sticking to the plan.
Chapter 13 vs. Chapter 7 Bankruptcy
There are two main ways to file personal bankruptcy under the U.S. Bankruptcy Code: Chapter 7 and Chapter 13 bankruptcy. In its simplest form, Chapter 7 wipes out most of your debts and, in return, you may have to surrender some of your property. Chapter 7 doesn't include a repayment plan. Your debts are simply eliminated forever. Chapter 13 involves a repayment plan in which you pay all or part of your debts during a three- to five-year period. In a Chapter 13, you propose a debt repayment plan that requires court approval and thereafter keeps creditors at bay as long as you keep making payments.
Debts that Remain After a Chapter 13 Discharge?
Obtaining a discharge in Chapter 13 bankruptcy will not eliminate all debts. Exceptions to a Chapter 13 discharge include, generally claims for child support and spousal support (alimony); educational loans; any driving under the influence (DUI) liabilities; criminal fines and restitution obligations; certain long-term obligations, such as home mortgages, that extend beyond the term of the plan; and any debts not provided for in a wage-earner plan.
How a Bankruptcy Attorney Can Help
Getting the right help when you file for Chapter 13 bankruptcy is crucial to its success, whether you file on your own, get a lawyer, or use a bankruptcy petition preparer. Consider seeking a consultation with an attorney to help you decide whether you need legal representation or can simply go it alone. Many bankruptcy attorneys offer consolations free of charge.