Why Consider Chapter 13 Bankruptcy?

Chapter 13  bankruptcy  provides individuals with court supervised repayment plan.

The amount paid to creditors can range from very little to 100%, depending on the debtor’s resources and goals.

The plan protects the debtor from collection action during the case and discharges any unpaid balance of dischargeable debts at the end of the plan.

Why file bankruptcy to repay?

In Chapter 13, the debtor can impose a debt management plan on creditors. Once the court confirms that plan as complying with the law, all creditors are bound to comply, whether or not they agree.

  • All creditors are kept from suing.
  • Interest stops running.
  • The court will enforce the plan against uncooperative creditors.
  • No tax is triggered by 13.

Compare the benefits of 13 with debt management or debt repayment plans.

Unique to 13

The discharge in Chapter 13 even covers some debts that cannot be discharged in Chapter 7, including marital property debts.  It is a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start.

Chapter 13 permits the debtor time to pay debts that can’t be discharged in either chapter, like recent taxes or back child support; to cure defaults on home mortgages; and to eliminate that part of a lien that is greater than the value of the asset at the beginning of the case.   More on reducing or eliminating liens

Unlike credit management plans outside of bankruptcy, creditors don’t get to choose whether to be bound by the plan.  Think of Chapter 13 as a court enforced debt management plan.

Who should consider Chapter 13?

Debtors choose to file a repayment plan under Chapter 13 when

  • they owe debts not dischargeable in Chapter 7 ( such as taxes or child support)
  • 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
  • their income may trigger a substantial abuse objection

The Chapter 13 plan does not have to pay debts in full; it can provide for only fractional payment to unsecured creditors.

How much the plan has to pay to creditors is a function of the confirmation tests.

The Bankruptcy Code does require that priority claims be paid in full.  The most common priority claims are recent taxes and family support.

Who is eligible for Chapter 13?

To file Chapter 13, you must be

  • an individual (no corporations or partnerships);
  • have a regular income greater than your reasonable living expenses;
  • have liquidated , unsecured debts not exceeding $360,475  and secured debts not exceeding $1,0181,400.

Telling if a debt is  secured.

liquidated debt is one where the amount the debtor owes is known, or capable of easy calculation.

For example,  a loan is a liquidated debt; in contrast, the damages owing in an auto accident are usually unliquidated until judgment is entered.
While you can only file Chapter 7 every 8 years, you can file a Chapter 13 bankruptcy even if you got a discharge in a Chapter 7 case filed at least 4 years ago.

Under the amended Bankruptcy Code, you can file a second Chapter 13 within two years of filing a previous Chapter 13.

 Read more

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About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.