What is 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 bankruptcy is sometimes called a reorganization or a wage-earner’s plan. It allows for individuals to create a plan that will repay all or some of their debts.
The heart of the Chapter 13 bankruptcy is the Chapter 13 Plan, which the debtor proposes as a way of making payments to creditors over a three to five year period. The period can be as little as 3 years if the debtor’s current monthly income averaged over the last six months is below the state median.
If the debtor’s current monthly income is greater than the applicable state median, the bankruptcy plan generally must be for five years. In no case may a Chapter 13 plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts.
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7 bankruptcy. Perhaps most significantly, chapter 13 bankruptcy offers individuals an opportunity to save their homes from 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 of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the 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.
Tags: bankruptcy, Chapter 13 bankruptcy, debts, foreclosure, law, legal, mortgage