Chapter 13 Bankruptcy

A Chapter 13 bankruptcy enables individuals with a regular income to propose a repayment plan to repay all or part of their debts. In many cases, Debtor obtains a complete discharge of all dischargeable unsecured debts and may have to repay only part of their debts. Of course, some debtors will have a sufficiently high income to repay their debts in full during the plan period. The payments to the creditors are generally over a three-year (36 months) or five years (60 months) period. During the repayment period, the law forbids creditors from starting or continuing collection acts.  This includes lawsuits, wage garnishments, and phone calls; Chapter 13 can also stop collection acts directed at the debtor’s property.

Why File a Chapter 13 bankruptcy?

Frequently, the reason that most debtors (who can be a single person or a married couple, but not business entities) decide to file a chapter 13 bankruptcy is that the debtors are not eligible to file a Chapter 7 bankruptcy. Chapter 7 is a liquidation bankruptcy in which there are no repayments; however, there is an income ceiling for Chapter 7. The income ceiling is based on the state’s median income for the household size of the debtor(s). Debtors that earn over the income ceiling for their household size must file Chapter 13. However, even debtors who make below the income ceiling for their household size may choose to file a Chapter 13 bankruptcy because there are certain advantages with Chapter 13 that are not available in Chapter 7. These advantages include:

• Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. However, the debtor(s) must be able to make their mortgage payments to the mortgage holder and be able to pay a Chapter 13 plan payment that is sufficient to catch-up on the delinquent mortgage payment over the plan period. 
• The debtor may not have to repay all of their unsecured debts in full. In many cases, the debtor can obtain a Chapter 13 discharge by repaying only part of his or her unsecured debts. The total amount to be repaid can be much less than the amount the debtor would have to repay in a consolidation agreement outside of bankruptcy. 
• The Chapter 13 debtor keeps his nonexempt property; the Chapter 7 debtor must surrender his nonexempt property to the trustee upon the trustee’s request. 
• If the debtor has a second mortgage that is not supported by the value of the house at the time of filing the bankruptcy, the Chapter 13 debtor can have the court “strip” (i.e. declare the secured second mortgage lien to be void) the second mortgage from the house and require the second mortgage holder to share in the repayment to the unsecured creditor class;
• If the debtor is behind on vehicle payments, the Chapter 13 debtor can use the Chapter 13 plan to catch-up and keep the vehicle.
• If the debtor has owned his vehicle for a sufficient time period, the debtor can obtain a court order that allows him or her to repay the value of the collateral rather than the full debt. 
• A Chapter 13 discharge is broader than a Chapter 7 discharge. A Chapter 13 discharge will also discharge debts to an ex-spouse that arise out of divorce proceedings. A Chapter 7 discharge does not discharge this type of debt.  A Chapter 13 proceeding can stop a contempt proceeding in a divorce case for nonpayment of this type of debt. 
• Chapter 13 has a provision that can protect co-signers in consumer debts. 
• Chapter 13 is an arrangement which the debtor makes a consolidated payment to the creditors. The law requires the creditors to join the consolidation, and accept the court-ordered repayment once the Chapter 13 plan is approved.  Individuals will have no direct contact with the creditor during the Chapter 13 plan period. Outside of a Chapter 13 bankruptcy, creditors do not have to join a consolidated repayment arrangement.