Introduction to Chapter 13 Bankruptcy
Chapter 13 bankruptcy is the chapter of the bankruptcy code that provides for the adjustment of debts of an individual with regular income. A Chapter 13 bankruptcy will allow a debtor to keep his or her property and pay down debts over a period of time, usually from three to five years.
Chapter 13 is similar to a reorganization and is often called a wage-earner’s plan. In Chapter 13 the filer creates a plan detailing the repayment of some or all of their debt.
Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.”
A Chapter 13 Plan often must last for the full 5 years if the debtor’s current monthly income averaged over the last 6 months is greater than the state median. In no case can a Chapter 13 Plan be proposed that lasts longer than 5 years. Creditors are prohibited by law from starting or continuing collection activity during the time the Chapter 13 bankruptcy is active.
There are many advantages a Chapter 13 has over a Chapter 7 liquidation bankruptcy. One big advantage is that a Chapter 13 allows individuals a chance to save and keep their homes when facing a foreclosure.
By filing a Chapter 13 bankruptcy an individual stops foreclosure proceedings, and can then make payments over the life of the plan that cure past-due delinquent payments. However, the Chapter 13 filer must still make the regular monthly mortgage payments while the Chapter 13 is active.
Another advantage Chapter 13 has over Chapter 7 is that secured debts (other than a home) can be crammed-down or rescheduled and extended over the life of the bankruptcy. This often means substantially lower monthly payments.
Chapter 13 bankruptcy also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Also, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 bankruptcy protection.