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Guide to Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a personal form of bankruptcy under which the debtor sets up a payment plan to pay back their creditors over a period of time. Unlike under Chapter 7, the debtors are usually allowed to keep most of their property.


Who Should File For Chapter 13?


Because Chapter 13 bankruptcy allows debtors to pay their creditors back over a set period of years, Chapter 13 bankruptcies are the preferred choice for debtors who have a steady stream of income.


That said, even those debtors with a steady stream of income who would prefer to file for Chapter 7 bankruptcy may not have a choice in the matter. Under the federal means test, the law requires those with disposable income over a certain threshold to file a Chapter 13 rather than a Chapter 7 bankruptcy. Under a Chapter 7 bankruptcy, the debtor's debts are often discharged with no payment whatsoever being made to the creditors. Under Chapter 13, creditors are usually paid at least a little, and the law would prefer that people who can afford it file a Chapter 13 rather than a Chapter 7.


The differences between Chapter 7 and Chapter 13 bankruptcy do not end there. In Chapter 7, a trustee sells what assets the debtor has to pay their debts. Under a Chapter 13, the debtor is allowed to keep their exempt property while the payment plan is being carried out. The definition of “exempt” varies state by state, but the debtor is usually allowed to keep items like clothing, furniture, household items, and personal property. Depending on whether the payment plan is successfully completed and on the features of the loan involved, debtors can usually keep their home and vehicle as well.


Repayment Plans


After you file a Chapter 13 repayment plan, the court and the trustee have to approve it. To be approved, a repayment plan must either represent a satisfaction of all the outstanding debt or represent a utilization of all of the debtor’s disposable income, which is income left over after the debtor’s taxes and living expenses are paid, towards his debts. Repayment plans typically last for a period of either three or five years, during which time you’ll pay a manageable amount to the trustee every month. The trustee will then distribute that money to the creditors. Once the specified period of time has expired, any remaining debt is usually discharged, even if the creditors at issue have not been paid in full. The law reasons that the creditors at least got something under the Chapter 13 plan, which is more than they likely would have gotten under a Chapter 7 liquidation.


In some cases, a debtor may be unable to make the mandatory monthly payments while the repayment plan is in full swing. If this happens, the plan may be modified by the trustee or petitioned by the court to be turned into a Chapter 7, in which case the trustee would sell your assets and the debts would be discharged.


Co-Debtors


If you owe a debt jointly with someone else, say a spouse, the Chapter 13 bankruptcy process protects that person from creditors just as it protects you. As long as the creditors continue to receive your monthly payments, they cannot try to collect the debt from you or your co-debtor.


Time Limit


After you file a Chapter 13 bankruptcy, you must wait 4 years before you are allowed to file one again. This time limit exists to prevent people from abusing the system by constantly building up debt and filing for bankruptcy whenever their creditors come around to collect.

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