Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed for people who need breathing room from creditors and have the income to repay at least some of their debts. Also known as “reorganization,” Chapter 13 bankruptcy lets filers catch up on overdue debts by making regular payments over a period of three to five years.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 bankruptcy works like this:

  • Pre-bankruptcy credit counseling: Current bankruptcy law requires all bankruptcy filers to complete a credit counseling session prior to filing their case with the court. In fact, the court won’t accept a bankruptcy petition unless it includes proof of a credit counseling session. The goal of the session is to make sure bankruptcy is the best choice for the filer.
  • The bankruptcy petition: The petition is a series of forms that require information about a filer’s debts, assets, income and expenses. Chapter 13 filers are also required to submit a repayment plan to the court when they file.                   
  • The Chapter 13 repayment plan: This plan outlines the filer’s plan for repaying creditors. Each month, the filer pays the amount designated in the repayment plan to the bankruptcy trustee. This trustee, whose job is to oversee the case, distributes the money to the filer’s creditors as indicated in the repayment plan. Most Chapter 13 filers design repayment plans that cover a period of three to five years.                   
  • The Chapter 13 discharge: At the end of the repayment period, filers who have made all payments according to the repayment plan are eligible for a bankruptcy discharge. The discharge is the official end of the case. In some cases, Chapter 13 filers are eligible to have remaining unsecured debt forgiven at this point.                        

The idea behind Chapter 13 bankruptcy is that filers repay priority debts to the best of their ability. Some debts may be repaid in full; others may be repaid only partially. Each individual case is different.       

Who Can File for Chapter 13 Bankruptcy?         

Because it requires filers to make consistent monthly payments, Chapter 13 bankruptcy is specifically designed for people who have a dependable source of income. Missing a payment in the repayment plan can put a filer at risk of having his or her case dismissed by the court and thus losing the chance for a bankruptcy discharge.      

Those who don’t have sufficient income to make regular payments shouldn’t despair, though: Chapter 7 bankruptcy offers a debt forgiveness plan for people with lower incomes.          

Anyone interested in learning whether Chapter 13 bankruptcy might work in their situation should consult with a bankruptcy lawyer.


Can Chapter 13 Bankruptcy Stop Foreclosure?

Chapter 13 bankruptcy is often hailed for its ability to delay or prevent mortgage foreclosure. It’s important to note, though, that Chapter 13 does not automatically stop foreclosure from happening. Here’s a look at the connection between the two:                   

  • The automatic stay: When filers submit their bankruptcy petitions to the court, a legal protection called the automatic stay takes effect. The automatic stay prevents collection action of all sorts by a filer’s creditors. In this context, foreclosure is considered a form of collection. This could allow the filer time to become current on past-due mortgage payments to prevent a foreclosure.  However, if the foreclosure sale is completed before the bankruptcy petition is filed or the filer misses a mortgage payment, the filer may still lose his or her home.                  
  • The repayment plan: While Chapter 13 bankruptcy has the power to rearrange filers’ debts so that they can catch up, it cannot modify the terms of a primary mortgage. In other words, Chapter 13 filers who want to remain in their homes must continue making mortgage payments as outlined by their mortgage agreement.                   
  • Reorganization: Even though mortgage payments cannot be changed, some filers find that Chapter 13 bankruptcy helps them afford their homes by limiting their other expenses. Getting rid of a few credit card bills, for example, sometimes frees up significant income to put toward mortgage payments.          
  • Breathing room: Even those who cannot afford their mortgage payments after filing for Chapter 13 may see benefits. Because of the automatic stay’s protection, Chapter 13 filers can often stay in their homes for several months or years without being hassled by creditors while they figure out new living arrangements.

Is Chapter 13 Bankruptcy Right for Me?

Anyone interested in learning more about how Chapter 13 bankruptcy works or whether it might help their financial situation should connect with a bankruptcy lawyer in their area. A lawyer can explain relevant state laws and offer advice about what steps to take for improved personal finances.

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