Exploring Chapter 13 Bankruptcy

Posted on: 2 January 2019

Many people who are drowning in debt are reluctant to file bankruptcy. They may be worried it will affect their credit even more, or they are concerned others will think less of them for neglecting their creditors. While these are legitimate concerns, they aren't necessarily true, particularly when people file Chapter 13 bankruptcy rather than Chapter 7. Here is what you should know about your legal rights under the federal bankruptcy code.

What Is The Difference Between A Chapter 13 And A Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy allows the debtor to completely discharge most or all of their debts, essentially wiping the slate clean and leaving them owing nothing. Some debts, such as student loans, cannot be discharged, and they must meet other criteria, like qualifying income guidelines.

In essence, they must lack the income and/or ability to repay their debts. They may potentially lose some of their assets, too, as everything that doesn't fall under a protected exception will be liquidated to pay creditors.

A Chapter 13 bankruptcy is more suited to people who have the income to repay some or all of their debts, just not on the timeline their creditors expect repayment. Their assets aren't usually liquidated, and some debts may be forgiven. Both a Chapter 7 and Chapter 13 bankruptcy can remain on a credit report for seven years.

How Does Chapter 13 Bankruptcy Work?

With a Chapter 13 bankruptcy, the debtor, with the help of his attorney, submits a repayment plan proposal to the court they feel they can financially handle. It must also meet the legal requirements by law. A repayment plan typically lasts for 3-5 years. The act of filing for bankruptcy temporarily suspends any collection activity, repossessions, or foreclosures while the bankruptcy court consider the proposal.

The judge will look over your proposal and determine your priority debt, your secured debt, and your unsecured debt. Priority debts are things like bankruptcy legal fees and back taxes; secured debt is things like your vehicle and primary residence; and lastly, unsecured debt is debt such as credit cards and medical bills. Priority and secured debt must be repaid but unsecured debt may be reduced or eliminated at the judge's discretion. The biggest benefit of a Chapter 13 bankruptcy is it allows the debtor to keep his or her home as long as they can afford the payments moving forward.

What Happens Once The Repayment Plan Is Approved?

You will immediately begin making a set payment to a court trustee each month or sometimes each pay period. The trustee will disburse the funds according to the plan, paying each creditor until they are paid off. The debtor must continue to make timely payments until the terms of the repayment plan are met.

For more information, contact a Chapter 13 bankruptcy lawyer.