Chapter 13 Bankruptcy Basics

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Chapter 13 Bankruptcy Basics

Chapter 13 is the debt repayment chapter for individuals, including those who operate businesses as sole proprietorships, who have regular income, and whose debts do not exceed specified levels. A Chapter 13 bankruptcy is also called a "wage earner’s" plan. A Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. The information required to be provided with the Chapter 13 petition is much the same as that for a Chapter 7 petition.

What Chapter 13 does

Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future disposable income. The Chapter 13 debtor proposes a three-to-five-year repayment plan that must be approved by the Bankruptcy Court. During this time the law forbids creditors from starting or continuing collection efforts. Instead, the debtor pays the amounts set forth in the plan to the Chapter 13 trustee, who distributes the funds to creditors in return for a small fee. The debtor may not incur new debt without consulting the trustee, because additional debt may compromise the debtor’s ability to complete the plan. The Chapter 13 debtor receives a discharge of most debts after the debtor completes the payments required under the plan.

Advantages

Despite the fact that Chapter 13 does not provide for the complete discharge of debt in most Chapter 7 cases, Chapter 13 offers individuals a number of advantages over Chapter 7. Perhaps most significantly, Chapter 13 allows the individual a chance to save his or her home from foreclosure. Instead, by filing under this Chapter, individuals can stop foreclosure proceedings. Payments to the mortgage lender may be made over the original loan repayment schedule (which may be longer than the plan) as long as any arrearage is made up during the plan.

Likewise, Chapter 13 allows individuals to reschedule and possibly lower payments on secured debts in addition to the mortgage loan for their primary residence. Chapter 13 also has a special provision that protects third parties—e.g., loan co-signers—who are liable with the debtor on "consumer debts."

What the individual must do

In Chapter 13, the individual makes the plan payments to a trustee who then distributes payments to creditors according to the plan, which may offer creditors less than full payment on their claims. Individuals will have no direct contact with creditors while under Chapter 13 protection. Filing the petition under Chapter 13 automatically "stays" (stops) most collection actions against the debtor.

Three types of claims

There are three types of Chapter 13 creditor claims: priority (e.g., taxes), secured (e.g., a home mortgage loan) and unsecured (e.g., credit cards). The plan need not pay unsecured claims in full as long the plan provides that the debtor will pay all projected "disposable income" (as the law defines that term), and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under Chapter 7.