Chapter 13 Bankruptcy : The Basics

Under Chapter 13 bankruptcy, persons are provided with a way, under federal law, to combine all of their debt. It creates a repayment plan so that creditors will receive all or some of what they are owed over a set amount of time. The basic principle is that you will have enough money to pay for your current living expenses, including housing, food, car, utilities, insurance, etc. After those expenses are paid, the remaining income you have available will be used to pay down your debt over a three to five year period. If all of your outstanding debt cannot be paid in that time frame the remaining debt will be discharged. Payments under the plan are made to the bankruptcy trustee. The amount that you pay to the trustee, who manages the bankruptcy estate, is not necessarily based on the amount that you owe. It is determined by your ability to pay. A qualified bankruptcy lawyer can review your case and explain how the rules will apply to you. Chapter 13 bankruptcy is usually used by persons who have assets, such as a home or other property, over the exemption amounts for the state in which they live, or large amount of non-dischargeable debts.

The Chapter 13 Process

When you file Chapter 13, you will be required to submit a detailed budget that includes your monthly living expenses and your take-home pay. Any income in excess of your expenses will become part of the bankruptcy estate and be paid to the bankruptcy trustee. The trustee then distributes the money to your creditors on a weighted basis determined by which debts have priority. The payment period generally lasts for three to five years. If you still owe money at the end of the payment period, all the remaining unsecured debt is forgiven. Chapter 13 payments can be automatically drafted from your bank account by the trustee if you choose.

Chapter 13 allows any secured loans which will be paid off during the plan to be rewritten reflecting the current fair market value of the property. Meaning that if you owe more than an item that secures the debt is worth, you can re-value the property down to market value and only owe that amount. Of course in bankruptcy paying off secured property is always voluntary, you can relinquish the property and owe nothing if you choose.

Another benefit is available for homeowners under Chapter 13 bankruptcy. Back mortgage payments can be included in the Chapter 13 payment plan. If you can continue to make the regular payments on your home after the Chapter 13 petition is filed, you will be able to keep your home and make up your back payments through the repayment period. This provision of Chapter 13 was originally created to prevent home foreclosure.

Typically debts that you owe to the government are not dischargeable; but including them in your Chapter 13 plan can have many benefits. Chapter 13 freezes interest and penalties on taxes. This will allow your payments to go directly to the principle, greatly reducing your interest and penalty burden. Chapter 13 will stop the government from adding more penalties and interest to your back taxes.