Chapter 13 bankruptcy is the reorganization of an individual consumer's debt
with a new payment schedule. If you have too much disposable
income to qualify for chapter 7 or have assets you want to protect,
you may want to consider this code. Your debts must be below a
certain level and you must have steady income.
With this chapter the debtor reaffirms to pay all or a part of
their debt. The amount of repayment can range from 10% to 100%
depending on the debtor’s income and the composition of amount
owed. This code allows the debtor to restructure their payments and
set up a new payment schedule (usually 3-5 years) that is more
For an individual to qualify under this code unsecured debt may
not exceed $250,000 and secured debts $750,000. Payments are made to
secure creditors first to the extent of their secured interest and
priority. Non priority creditors may be partially paid- credit cards
and some taxes etc. In general, creditor approval is not required.
Secured creditors can object to the repayment plan however, the
court can force acceptance. (Cramdown)
This form of bankruptcy is used when the petitioner has property
they want to keep like a mortgage that is about to be foreclosed on
and other non-exempt assets that would be liquidated under chapter
7. Filing under this code will also halt all collection and
foreclosure proceedings (including IRS) and allow the debtor to
catch up on their payments and reinstate their original agreement.
Your payments will be made to a Trustee who will disburse them in a
manner called for in the court-approved plan. During this time the
Trustee will have control over your (personal) finances and any
credit-related matters will have to be cleared through him.
Who should consider this chapter?
* If you are behind on your mortgage and need to catch up or if you
owe the IRS.
* If the assets you want to protect would be liquidated
under a chapter 7 and your disposable income is to high to qualify
for a chapter 7.
* If you need relief from collection proceedings or
if you wish keep your obligation to pay your creditors and need some
* If you wish to leave the option of filing a chapter
7 at some time in the future. If you are a farmer who does not
qualify for chapter 12 and have debt unrelated to farming.
* You filed
chapter 7 sometime in the past 6 years. You have a co-signer. If you
could pay your debts within 3-5 years.
Downside of Chapter 13
Chapter 13 ruins your credit. It will remain on your credit report
for up to 10 years. It will also cost you more for any credit you do
get in the form of higher interest rates. The Trustee appointed to
oversee the completion of your filing may charge up to 8% of the
amount filed on. You will have to pay attorneys, court and filing
fees up front.
If your debts are primarily unsecured debt, (credit cards,
medical bills, unsecured loans etc.) you may want to consider debt
restructuring through a credit counseling or debt management agency
who specializes in consolidation of unsecured debt.