How Chapter 13 Bankruptcy Works
In Chapter 13 bankruptcy, you keep your property, but pay back all or a portion of your debts over a three to five-year period. This is unlike Chapter 7 bankruptcy, where most of your debts are cancelled but you may have to surrender some property to the bankruptcy trustee to pay your creditors. Because you end up paying some of your debts over time in Chapter 13 bankruptcy, it is also called reorganization bankruptcy.
Learn the basics of Chapter 13 -- who is eligible, how creditors are paid, and how the Chapter 13 process works.
Chapter 13 eligibility
Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet the payment the court decides is fair. If your income too low, the court might not allow you to file for Chapter 13.
Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Bankruptcy Administrators office. There are several such agencies and you are free to pick whichever you like. I will say that many of my clients have reported a positive experience with an agency out of Raleigh called Hummingbird Credit Counseling.
The Chapter 13 repayment plan
The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how (and how much) you will pay each of your debts.
Your Chapter 13 plan must pay certain debts in full. These debts are called "priority debts," because they're considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.
In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you've fallen behind in your payments).
The plan must show that any disposable income you have left after making these required payments, and after paying all your normal monthly expenses, will go towards repaying your unsecured debts, such as credit card or medical bills. You don't usually have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any "extra" income towards their repayment.
The length of your repayment plan depends on how much you earn and how much you owe. Those with higher amounts of disposable income will have to make payments over a longer period of time than those whose disposable income is lower.
Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out.
For answers to other bankruptcy questions you may have, be sure to check out the other pages listed under the "About bankruptcy" link found at the top of every page on our site.
