When you hear the word “bankruptcy,” it’s probably Chapter 7 that comes to mind. The relatively quick fresh start bankruptcy is far more common than Chapter 13. But, Chapter 13 bankruptcy offers an important opportunity for people who either don’t qualify for or won’t benefit from Chapter 7.
How is Chapter 13 Bankruptcy Different?
While Chapter 7 bankruptcy wipes out unsecured debt like credit card debt and medical bills, Chapter 13 bankruptcy is designed to allow people with regular income to pay past-due balances over time, without incurring ongoing late fees and other charges or fielding constant calls from debt collectors.
At first glance, it may not be clear why someone filing for bankruptcy would choose a three to five-year payment plan over eliminating debts. But, Chapter 13 is a better option for many debtors.
For instance:
• A Chapter 13 bankruptcy offers a solution for people who have too much income to qualify for Chapter 7
• Chapter 13 bankruptcy provides a means of managing past-due secured debt, such as car loans and mortgage debt, without losing the property
• Chapter 13 bankruptcy allows people with significant assets to manage debt while keeping their property
How Does Chapter 13 Bankruptcy Work?
Chapter 13 bankruptcy begins with the filing of a petition and various schedules detailing debts, income, assets, and expenses. In most cases, an automatic stay is entered as soon as the petition is filed. The automatic stay temporarily prohibits creditors and debt collectors from collection action, including:
• Collection calls
• Collection letters
• Filing lawsuits
• Initiating wage garnishments
• Repossessing property, such as automobiles
• Foreclosing on your home or other real estate
This temporary break in the collection action gives the debtor the breathing room necessary to evaluate and plan. The debtor works with his or her bankruptcy attorney to construct a monthly repayment plan, which will be filed with the court. The proposed repayment plan may be filed with the petition, or at any time within the 14 days following the filing of the petition. The Chapter 13 plan must be approved by the court, and creditors will have an opportunity to object.
Constructing a Successful Chapter 13 Plan
Creating a Chapter 13 plan that is workable for the debtor and is likely to be approved by the court requires careful planning and analysis. In a Chapter 13 case, not all debts are treated equally. Certain types of debt must be paid in full. Some secured debts must be paid in full if the debtor wants to keep the collateral, while others may require only payment of the value of the asset securing the debt.
In short, determining the appropriate allocation of payments and the amount the debtor will be required to pay and the duration of the plan can be complicated, and is best accomplished with the help of an experienced bankruptcy attorney.
The Chapter 13 Discharge
When a Chapter 13 plan has been successfully confirmed and completed, the debtor may discharge remaining unsecured debt.
For example, if the debtor included $13,000 in credit card debt in the plan, but was only able to pay $150 per month toward that debt pursuant to a confirmed plan, he or she would have paid $9,000 at the end of a five-year plan and the remaining $4,000 can be discharged. When debt is discharged, the debtor is no longer required to pay it, and that debt cannot be reported to credit bureaus as outstanding.
So, Chapter 13 bankruptcy can also give an individual or married couple who is overwhelmed by debt a fresh start. The investment of time and money is greater than that required for a Chapter 7 bankruptcy case, but assets are protected, and this type of relief is available to higher-earning debtors who may not be eligible for Chapter 7 bankruptcy.
Is Chapter 13 or Chapter 7 Right for You?
Both Chapter 13 and Chapter 7 bankruptcy provides solutions for people who are overwhelmed by debt. But, they solve different problems for people in different financial circumstances. The best way to determine whether one of these solutions is right for you is to talk with an experienced consumer bankruptcy attorney. You can schedule a consultation right now by calling 440-946-7656.
