What is Chapter 13?

Chapter 13 is a type of bankruptcy filing in the US that may be referred to as "debt reorganization." For people demonstrably able to pay back some or most of their debts (by showing proof of income), this may be a better filing choice, and in particular, if you’re attempting to keep property, like homes or cars, this bankruptcy filing may help you do this better than Chapter 7 filings. Both types of bankruptcy plans are limited to individuals, though in some cases, if you own a business, you may be required to pay back money to the business for which you have personal liability. However, most businesses that file for debt reorganization file Chapter 11 and aren’t permitted to file for this individual-based bankruptcy.

Under Chapter 13, prior to filing, you visit a court approved credit counselor, and disclose information about every debt you owe. You also have to provide the counselor with a list of your monthly expenses, including amounts you must pay on secured debt like mortgages or car payments. The money left over is designated to repay your other debts, and debts are prioritized. For instance if you owe child support, back taxes, or are personally liable for debts to employees, these debts have priority status. Next, debts that would result in you losing property if you did not pay them are usually second in priority (excluding mortgage). Lastly unsecured debt, primarily credit card debt, gets lowest priority, and if you successfully complete your repayment plan, which takes three to five years, you’ll have some of these debts forgiven.

Filing Chapter 13 usually stops any actions taken against you by those to whom you owe money. Most creditors can’t sue you, or even continue harassing phone calls once you’ve filed. If you file with a lawyer then the lawyer tends to field these calls while you await a court date.

However, if your home is in foreclosure and you fail to file before the foreclosure takes place, you can still lose your home. You’re also limited as to the amount of debt you can possess if you want to use this bankruptcy filing. In general, you must have no more than slightly over $900,000 US Dollars (USD) in secured debt and no more than slightly over $300,000 USD in unsecured debt. You must also show that you’re going to be able to repay the debt, and honor any repayment plan your credit counselor develops. You should check these dollar amounts with a lawyer or local bankruptcy court since new rules could change the amount in the future.

Once you have developed a payment plan and filed Chapter 13 with the appropriate court, you make your payments to a court appointed or recognized trustee. This person metes out your payments to their appropriate sources, based on priority, and the trustee can collect a commission on the total amount collected, anywhere from 3-10%. You absolutely must strictly abide by the repayment plan and make all payments on time.

Failing to do so may change your eligibility to have some of your unsecured debts discharged at the end of the plan’s payment period. In some circumstances, if you have an emergency financial problem, the court may allow you to covert your Chapter 13 filing to a Chapter 7 filing. Note there are some debts, like child support, alimony, or back taxes that you may still be obligated to pay.

Another advantage to filing Chapter 13 is that you may be able to protect co-signers from any obligations you have to debtors. In some cases, co-signers can be absolved from any payments, or because you have a repayment plan, debt collection efforts may not be instigated against the co-signer. Under current bankruptcy rules, Chapter 13 bankruptcy remains on your credit rating for seven years, while Chapter 7 stays on your credit report for ten years. This can mean, provided you make your payments, that you’ll have a cleaner credit report sooner than you would with Chapter 7.

Disadvantages include that your future wages are reduced by whatever provisions are in your payment plan. Sometimes people need to make a fresh start to free themselves from most if not all of their debt, even if it means losing a home. Chapter 13 may not be workable if your income isn’t adequate to make repayments. It also burdens you with repayment plans for three to five years, which may be difficult to make.