What is a Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy reorganizes personal debt using the help of a bankruptcy court. Chapter 13 is one of the main forms of bankruptcy along with Chapter 7 (personal liquidation). Chapter 13 Bankruptcy is designed for individuals with regular income that for whatever reason are temporarily unable to pay their debts. The court reorganizes their debt but most of their debt is not discharged or erased as it is in Chapter 7. In general a plan is arranged through the court to pay back some or all of the delinquent debt over a 3-5 year period based on future earnings. As long as the debtor stays current on the payment plan at the end of the payment period any remaining debts will be discharged. Many debts are excluded from discharge; these include long-term secured obligations, student loans, alimony, child support payments, certain taxes, debts due to criminal restitution and/or death or injury caused by drunk driving.

In Chapter 13 Bankruptcy the debtor is allowed to keep all of their property where they could potentially lose most of it in Chapter 7. If you have a significant amount of secured property using Chapter 13 will stop your creditors from going after those assets and give you time to reorganize. Chapter 13 is also sometimes a good solution for getting a small sole-proprietorship business through a particularly nasty economic slump.

The 2005 Bankruptcy Act includes a very important provision stating that a debtor must be below their state's average median income in order to qualify for Chapter 7. This is determined through a 'means test'. If your income is too high for Chapter 7 you may be forced into Chapter 13 instead and a significant portion of your debts will need to be repaid rather than discharged. This can be a significant burden in the future and may erase much of bankruptcy's appeal. Filing any form of bankruptcy will negatively impact your credit history and your ability to access credit in the future.

In Chapter 13 the debtor files a petition with the bankruptcy court after which an 'Automatic Stay' goes into effect prohibiting creditors from harassment or taking any further actions outside of the bankruptcy court proceedings. Shortly thereafter a Chapter 13 Plan is filed with the court detailing how the monies will be reorganized and paid back to the creditors. The process can be lengthy and complicated and it is best to consult a good attorney.

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