Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is a payment plan through the bankruptcy court. Instead of paying creditors directly, debtors pay most, if not all, creditors through a court appointed trustee. Most payment plans last from 3 to 5 years. Debtors must have a steady source of income in order to make the payments.

A Chapter 13 bankruptcy can benefit the following types of people:

 

  • People who can afford to pay something to their creditors;

  • People who became delinquent on a mortgage or car loan due to a temporary financial setback;

  • People with a second mortgage or equity loan on a home that has declined in value. Sometimes, it's possible to obtain a cancellation of the the second mortgage/equity loan and its lien in a Chapter 13; and

  • People with property that would be lost in a Chapter 7 bankruptcy due to it's high value.

 

The amount of the Chapter 13 monthly payment depends on how much disposable income the debtor has available to pay creditors. Disposable income means any extra income a debtor has left over after paying for necessary monthly expenses. Debtors pay the trustee an amount equal to their disposable income each month by having the money deducted from their wages or bank accounts. The trustee then distributes the payments to creditors.

An important benefit of a Chapter 13 bankruptcy is that it can allow debtors to keep valuable property, such as a home or car, which may otherwise be lost to foreclosure or repossession. When a Chapter 13 case is filed, an automatic stay goes into effect and lasts throughout the payment plan. This means that all debt collection actions against the debtor must be stopped, including any threatened foreclosure or repossession. By stopping these actions and allowing the debtor to work out a payment plan, a Chapter 13 bankruptcy gives the debtor a chance to catch up on delinquent house and car payments without the risk of losing property.

A Chapter 13 payment plan doesn't mean that the debtor must pay back all debt. Once the payment plan is successfully completed, the debtor receives a discharge or cancellation of the remaining amount owed to creditors. Many people only pay a small percentage of the amount they owe on unsecured debt, such as credit cards.