Chapter 13 Bankruptcy

Debtors with a regular income can use Chapter 13 bankruptcy to cope with their overwhelming debts, but there are long-term consequences for consumers who take this route.

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Federal law offers different types of bankruptcy programs to deal with the varying financial problems of businesses and individuals. In particular, Chapter 13 bankruptcy is designed for individuals or married couples who are capable of working out their debts if given several years.

Debtors create a plan detailing how they plan to repay all or part of their debts during a period of no less than three and no more than five years. Because these individuals must have a regular income to qualify, Chapter 13 Bankruptcy is also referred to as a “Wage Earner’s Plan.”

A Chapter 13 filing is attractive to many debtors because it allows them to deal with their debts while keeping their property.

How Chapter 13 Works

To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $383,175 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,149,525 in secured debts, which includes mortgages and car loans. These figures are adjusted periodically.

An individual involved in Chapter 13 also must undergo credit counseling from an approved agency within 180 days of filing the bankruptcy suit.

To start the process, the debtor files a petition in the local bankruptcy court and pays required fees. The petition should list all assets and debts, income and expenses, any existing contracts or leases in the debtor’s name, as well as a statement of financial affairs and the most current year’s tax return.

Shorting after filing, the debtor also must file a repayment plan.  A bankruptcy judge will hold a hearing to determine whether the plan meets the requirements of the bankruptcy code and is fair to all parties involved. Creditors may raise objections to the plan, but the judge has the final say.

One of the biggest advantages of Chapter 13 bankruptcy is that an individual is given a chance to save his or her home. Filing a Chapter 13 petition suspends any current foreclosure proceedings against the individual. This buys time while the court considers the plan but does not eliminate the debt.

Debtors can arrange to make up delinquent payments over time, but under Chapter 13 rules, all new mortgage payments from the time of filing must be made on time.

As part of Chapter 13 bankruptcy, individuals can make adjustments to the payment schedules and amounts of secured debts other than mortgages. This can often result in lower payment amounts and a shorter period of repayment.

The debtor also enjoys the services of a mediator, or trustee, who distributes the payments made to the creditors. The debtor is not required to have any direct contact with his or her creditors under Chapter 13. In fact, all creditors are required by law to cease any attempts to recover the debts covered under the Chapter 13 process as long as all terms of the agreement are being met.

Chapter 13 Bankruptcy

Life after Chapter 13 Bankruptcy

Once the court approves a repayment plan, it is up to the debtor to make the plan work. Failure to make agreed-upon payments will bring the matter back to court for further review, which could include selling the debtor’s property to pay debts.

Bankruptcy may give debtors a breather from creditors, but there is a penalty to be paid on their credit reports. Under the federal Fair Credit Reporting Act, a Chapter 13 bankruptcy will be listed on the report for seven years. Debtors in this situation may find it difficult to get additional credit for years.

Chapter 13 bankruptcy can be a useful financial tool for people with serious debts who worry about losing their homes to bankruptcy. Anyone considering this course should consult a bankruptcy lawyer.

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Author

Al Krulick
Staff Writer

Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

Sources

  1. United States Courts. Individual Debt Adjustment. Chapter 13. Retrieved from: http://www.uscourts.gov/federalcourts/bankruptcy/bankruptcybasics/chapter13.aspx
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