Chapter 13 Bankruptcy
What is Chapter 13?
While Chapter 7 Bankruptcy is typically referred to as liquidation bankruptcy, Chapter 13 Bankruptcy is a reorganization bankruptcy. Chapter 13 is available to individuals and married couples with regular income that are looking to restructure their debts. Businesses are not able to file a Chapter 13, and if they wish to reorganize must file a more cumbersome Chapter 11 case.
In filing a chapter 13 bankruptcy, you list all your assets and all your debts, just like you would have done in a Chapter 7. In addition, you file a Plan of Reorganization, which is a document that states how you plan on repaying some, but not all of your debts over the next 3 to 5 year time period.
A Plan of Reorganization
Everyone’s Chapter 13 Plan of Reorganization is different, but they all need to follow the basic rules and guidelines set down by the Bankruptcy Code. Within your plan, certain payments will continue to be made the same the way they were before bankruptcy (house payments, for example.) Certain debts that are not dischargeable in Chapter 7 are repaid over the life of the Plan (tax debts, arrears on houses or cars, etc.)
Certain debts are provided new repayment terms (reduced interest, or new amortization period, for example.) The remaining amount of your debts are thrown in a bucket called your General Unsecured Creditors. They get paid based on what you can afford to pay them. For some people, they can’t afford to pay anything to their General Unsecured Creditors, and so no distribution is made to them. This entire amount, or your Plan Payment, is paid to a Chapter 13 Trustee who is responsible for distributing the money to your creditors in accordance with your plan.
What Chapter 13 Can Do For Me
There are a number of advantages that a Chapter 13 holds over a Chapter 7 Bankruptcy. It typically costs less up front for attorney’s fees in a Chapter 13, as these are usually financed within the Plan. In addition, you can save homes in foreclosure and cards that are being repossessed if you are behind on the payments.
You can also resolve tax debts by repaying the non-dischargeable portion and discharging the rest. Additionally, this can save you any property that you would have lost in Chapter 7 bankruptcy.
What it Can't Do
There are a number of disadvantages that come with Chapter 13 that need to be considered. While a Chapter 7 will only last a few months, a Chapter 13 will last several years. During this time period, you are prohibited from incurring any debt (of any kind) or selling any property without getting the Trustee and the Court’s permission. You can get permission, through the form of a Motion, assuming the transaction is a good idea. If you aren’t able to complete all your payments under the Plan, you typically won’t receive a discharge.
While this is a good overview of the Chapter 13 process, there are many additional provisions that come up in some cases, and which Chapter will best suit you and your needs is very dependent on your facts and circumstances. We recommend that you contact us and set up an appointment to meet with one of our attorneys, who will be happy to make a recommendation and strategy on the best direction for you and answer any additional questions you may have about the bankruptcy process.