Chapter 13 Bankruptcy: Making a Plan to Get Out of Debt
Chapter 13 is a reorganization proceeding. When the case is filed, a Chapter 13 plan is usually filed at the same time. The plan tells the court and creditors what your plan is to repay your creditors – to the extent they are paid at all.
Who Can File for Chapter 13?
Chapter 13 is only available to “individuals” (that is, people as opposed to corporations, limited liability companies or partnerships) who have a regular source of income and fall within the debt limits for both secured and unsecured debt. Chapter 13 was designed for wage earners – people who have a job and receive a regular pay check. However, individual business owners can also file if they otherwise qualify.
Why Do People File for Chapter 13?
Some people may be forced to file a Chapter 13 bankruptcy by the means test, but people may want to file bankruptcy if they have fallen behind on their payments on their house or car and want to try to keep it by making up the arrearages while making current payments; or if they have a non-exempt asset they want to keep that they might otherwise have to turn over to a Chapter 7 trustee, like a boat, camper, antique car, house or rental house. Chapter 13 also allows people to sell assets they might not want (like a rental property) and have some control over the sale process and how the proceeds are disbursed.
How Does the Process Work?
Chapter 13 plans take 36 to 60 months to complete. The amount of a monthly plan payment is determined based upon the amount of monthly income a debtor has, the kind of debt the debtor has (secured, priority or unsecured) and what property the debtor wants to keep. The plan payments are administered and disbursed by a Chapter 13 trustee, who also ensures that Chapter 13 plans meet all requirements. Most people who file Chapter 13 cases DO NOT repay their creditors in full. A Chapter 13 case is essentially a court ordered and court supervised repayment plan. In most cases, the attorney fees paid “up front” are less than in a Chapter 7 and remaining fees are paid over time under the terms of the plan.
A Solution for Tax Debt
A Chapter 13 bankruptcy is an excellent way to repay delinquent income taxes. The taxes and accrued interest are entitled to priority treatment (unless a tax lien has been filed) and can be repaid over 60 months WITHOUT INTEREST.
Chapter 13 vs. Chapter 7: What’s the Difference?
Though limited over the years by legislation, a Chapter 13 offers the advantage that some types of debts that can’t be discharged in Chapter 7 can be discharged in Chapter 13. Also, Chapter 13 offers a “co-debtor stay,” which if the requirements are met, prevents creditors from taking action against a co-signer or guarantor (like a relative or friend) even though the co-debtor has not filed a bankruptcy.
Overall, a Chapter 13 bankruptcy offers some alternatives that a person who qualifies for relief under Chapter 13 should consider as an alternative to Chapter 7.