Due to the complexity of bankruptcy law, and the difficulty
of determining which form of bankruptcy will apply to any
given situation, most people will benefit from consulting
with a qualified bankruptcy lawyer before filing for bankruptcy.
In simple terms, a Chapter 13 bankruptcy involves the reorganization
of a debtor's financial affairs. The goal is to create a payment plan
for the benefit of the creditors, while protecting the debtor from foreclosure,
garnishment, levy, or similar consequences.
In order to qualify for Chapter 13 bankruptcy, the debtor must have an
income that exceeds the debtor's reasonable living expenses, as it is
necessary that the debtor have sufficient means to provide repayment to
creditors of past debts. In some cases repayment may be for the full amount
of the debt, while in others the debtor may pay off only a small percentage
of certain debts - perhaps as little as ten percent.
This form of bankruptcy is commonly referred to as a "wage earner
A Chapter 13 bankruptcy will appear on your credit report for up to ten
Is Chapter 13 The Right Choice?
Most debtors will benefit from consulting with a qualified financial
professional before considering a Chapter 13 filing, and create a list
of obligations which will be subject to repayment under a Chapter 13 plan,
and map out a possible budget. Some debtors will realize at that time
that they cannot realistically live under that type of budget. Others
may discover that they will be better served by trying to resolve their
debts with their individual creditors outside of the bankruptcy process,
as opposed to going through a formal bankruptcy.
The Chapter 13 bankruptcy tends to be favored by debtors who have fallen
behind on secured loan payments, such as mortgages and car loans, as it
enables the debtor to keep possession of the property while catching up
on payments through a court-approved repayment plan. It may also be preferred
by a debtor who has valuable non-exempt property that would be liquidated
in the course of a Chapter 7 bankruptcy.
Some debtors will choose not to file for Chapter 13 bankruptcy, as they
do not wish to live under the scrutiny of the bankruptcy court which will
result from a successful petition. Many debtors lack the discipline to
abide by a Chapter 13 repayment plan. Only about 35% of debtors successfully
complete their plans. If you do not think that you can live under the
plan's budget, you may wish to reconsider a Chapter 13 filing.
The Automatic Stay
Once a debtor files for bankruptcy, the debtor's estate is protected
by the "automatic stay", which bars creditors from trying to
collect debts without the permission of the bankruptcy court. This provides
immediate protection against foreclosure, repossession of your car, eviction
from your apartment, garnishment of your wages or bank accounts, disconnection of
utilities, or other measures creditors may take to try to recover
The Chapter 13 Bankruptcy Process
After filing for Chapter 13 protection, a debtor will propose a repayment
plan for any debts and obligations. The proposal will be reviewed by a
bankruptcy court. If the plan is approved, the bankruptcy trustee appointed to the case will
collect the debtor's payments, distribute them to creditors, and
supervise the debtor's compliance with the court-approved repayment
plan. The debtor will be required to pay the trustee's fee.
During the repayment period, the bankruptcy trustee will have control
over the debtor's personal finances, and the debtor must submit any credit-related
matters to the trustee for review and approval.
The repayment period typically lasts from three to five years. During
this time, the bankruptcy court will not permit the debtor to spend money
on anything it deems "nonessential", and the debtor will have
to live under a strict, court-imposed budget.
Dismissal of the Petition
Some persons who file for Chapter 13 bankruptcy protection simply wish
to buy some time in order to prevent a foreclosure, or repossession of
a vehicle. If the debtor is able to regain firm financial footing before
the bankruptcy is resolved, the debtor may opt to petition for dismissal
of the bankruptcy petition and then pay off the arrearages in full.
In the alternative, a debtor may use the time to sell certain property,
such as a house, prior to foreclosure or repossession, as foreclosure
sales often do not result in the recovery of full market value.
In a "Chapter 13" Bankruptcy:
- You will propose a repayment plan for your debts;
- If approved by the court, a trustee will collect your
payments, distribute them to your creditors, and supervise your compliance
with the repayment plan.
- You will have to pay the trustee's fee.
Debtors whose debts exceed certain limits are barred from seeking Chapter
13 bankruptcy. (At the time of this writing, in order to file a "Chapter
13" bankruptcy, you must owe less than $269,250 in noncontingent,
liquidated, unsecured debts, and less than $807,750 in noncontingent,
liquidated, secured debts. You will most likely be unable to file a "Chapter
13" bankruptcy if you have filed and dismissed a "Chapter 13"
petition in the last 180 days, and should discuss any prior filing with
your attorney. You should also take care to propose a reasonable budget,
as most debtors find themselves unable to comply with the strict enforcement
of their "Chapter 13" plans, and end up dropping out of bankruptcy
before their plan is completed.
This type of bankruptcy can be particularly useful when a debtor believes
that his financial crisis is temporary, and that his income will continue
to grow in the future. Corporations and partnerships cannot file a "Chapter