Chapter 13 is a powerful debt restructuring tool.
Chapter 13 is a reorganization plan for your personal finances which typically last 3–5 years in duration. It consists of a monthly payment to the court that typically encompasses payments on ALL of your debt, with the typical exception being a mortgage, which you pay directly to you lender.
Who files Chapter 13?
You file Chapter 13 versus Chapter 7 bankruptcy for a number of reasons: Typical reasons are:
- You have to. If you make too much income, you are required to file Chapter 13 rather than Chapter 7.
- You want to. If you would lose some assets in Chapter 7, you can typically avoid or at least mitigate the losses in Chapter 13.
- You need to. If you have things like repossessions, foreclosures, out of control secured debt interest, and unsecured liens, Chapter 13 provides powerful relief not available in Chapter 7.
- You chose to. If you feel guilty about walking away from debt in a Chapter 7 bankruptcy, Chapter 13 allows you to pay some or all of your debts back. However, this time it is on YOUR TERMS, and not your lenders’.
- You have crippling student loan payment. Chapter 13 bankruptcy allows you to hold student loans at bay for up to 5 years. Although they are not discharged, this solution provides often needed breathing room while you reorganize.
- You have debts that do not go away in Chapter 7. Marital debts (although not marital support obligation) are dischargeable in Chapter 13 and not Chapter 7 bankruptcy.
- You have a driver’s license suspended for traffic infractions. Chapter 13 allows you to immediately reinstate your license in many instances.
How Does it Work?
In the big picture sense, some things have to get paid. These include car loans, mortgage arrears, certain priority debts like child and marital support arrears. An amount equal to what have been liquidated in Chapter 7 bankruptcy is paid in to the unsecured creditors. For instance, if in a Chapter 7 case you would lose $2,000 of assets to pay unsecured debt, the same amount must be paid into unsecured debt in Chapter 13 cases. And finally, other things happen within the bankruptcy such a lien avoidances, lien cram downs, and mortgage modification among other things.