What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a reorganization bankruptcy used to regain control of your finances by having debts repaid at a reasonable rate as determined by a bankruptcy court.
Chapter 13 bankruptcy allows people with a source of regular income to make a plan to repay all or part of their debts. Under this chapter, a debtor proposes a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. A plan for payments cannot be longer than five years. (See 11 U.S.C. § 1322(d)). During this time the law prohibits creditors from starting or continuing collection efforts.
Chapter 13 bankruptcies can take three to five years to complete.
Advantages of Chapter 13 Bankruptcy
Chapter 13 can be used to save a home from foreclosure. By filing under Chapter 13, a person can stop foreclosure proceedings and catch up on delinquent mortgage payments over time. Current mortgage payments must still be made on time. Chapter 13 also allows people to reorganize secured debts and extend them over the life of the Chapter 13 plan, which is either three or five years. Doing this will generally lower payments. Chapter 13 also protects third parties who acted as cosigners for the person declaring bankruptcy. Finally, Chapter 13 acts like a consolidation loan, so payments are made to a trustee who then distributes payments to creditors, so the person declaring bankruptcy does not have to have direct contact with creditors while under Chapter 13 protection.
Who is Eligible for Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is generally available to anyone who:
- has total debts are less than $2,750,000 (this number is periodically updated, so check the current version of 11 U.S.C. § 109(e))
- has not during the preceding 180 days had a bankruptcy petition dismissed
- has within 180 days before filing, received credit counseling from an approved credit counseling agency
Do All Debts Have to be Paid?
A person who files Chapter 13 may be able to discharge all remaining debt upon completion of the payment plan if the debtor: (1) paid all domestic support obligations; (2) has not received a discharge in a prior recent bankruptcy case, and (3) has completed an approved course in financial management (See 11 U.S.C. § 1328).
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328. Debts not discharged in Chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime.