Chapter 13 bankruptcy is a repayment plan that allows the debtor to cure defaults on home mortgages, pay taxes, and discharge debts not dischargeable in Chapter 7 while protected from collection action.
Throughout the case, the debtor stays in possession and control of his assets.
Chapter 13 is a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start.
The amount that a debtor can owe is capped in Chapter 13; individuals whose debt exceeds either of the limits must file another chapter.
When 13 is best
Debtors choose Chapter 13 when
- they owe debts not dischargeable in Chapter 7 ( such as taxes, child support, and tax penalties)
- they have liens that are larger than the value of the assets securing the debt
- they are behind on car or house payments
- their assets are worth more than the available exemptions
What does the plan provide
The debtor proposes the terms of the Chapter 13 plan.
The plan sets out how much money the debtor will pay to the trustee each month and how much should be paid to each category of creditor.
The plan does not have to pay debts in full; it can provide for only fractional payment. How much the plan has to pay to creditors is a function of the Chapter 13 confirmation tests.
The discharge the debtor gets at completion of the plan is at least as expansive as the discharge in Chapter 7, if not more so. Also, the debtor can strip off mortgage liens from real property.
Advantages of 13
Chapter 13 is flexible. A 13 case be freely dismissed if the debtor finds he doesn’t need bankruptcy protection any longer, or it can be converted to Chapter 7, if the debtor is unable to complete the plan payments.
The Bankruptcy Code does require that priority claims such as recent taxes and family support be paid in full.
Image courtesy of Leo Reynolds.