Chapter 13 is similar to Chapter 7 except that it goes a step further, requiring a repayment plan. This form of bankruptcy allows the individual to undergo financial reorganization supervised by the federal bankruptcy court. This chapter should only be considered for individuals who possess the disposable income needed to repay a portion of their debts[i].
Under Chapter 13, the debtor proposes a plan to repay his or her creditors over a 3-5 year plan. This is a written plan which details all of the transaction including their durations that will occur. Thank goodness you've had the foresight to hire a bankruptcy attorney who will draft the repayment plan for you!
Repayment according to plan must begin 30-45 days after the case commences. The goal is for the individual to keep his or her property, and all creditors are repaid less money than they are owed.
After the Chapter 13 case has been filed, the debtor may not obtain additional credit without permission of the bankruptcy court. The creditors may also be unwilling to lend money to a bankrupt debtor, even one attempting to repay their debt. This is also the situation for Chapter 7, 11 and 12.
The advantages of Chapter 13 over Chapter 7 include being able to stop foreclosures though it would be reinstated upon completion of the bankruptcy; the ability to discharge debts not dischargeable under Chapter 7; bifurcate the security interest of creditors in some properties that creditors are either charging too much interest for, or are over-secured, or both and leading down to a cram-down modification of the debt; prevent collection activities against non-filing co-signers during the duration of the case. Chapter 13 may present more relief to a debtor with substantial assets or a business. There are also fewer procedural requirements for the confirmation of a plan especially the absence of a requirement that the creditors vote to confirm the Chapter 13 plan. If the consumer debts are guaranteed by individuals, for example relatives, the advantages may be in favor of Chapter 13.
A unique feature of Chapter 13 is the debtor's right to dismiss the case anytime if the case has not been converted from another chapter. The exception to this right occurs in circumstances when bad faith is established.
Good faith may be challenged in a Chapter 13 filing due to questions arising because of multiple filings by the debtor or determining the adequacy of the proposed repayment under the plan. The bankruptcy court must consider the circumstances as a whole.
Discharged debts under Chapter 13 may include the following: secured debts paid in installments that extend beyond the length of the plan; trust fund taxes; nonpriority taxes for which a tax return was not filed within 2 years before the date of the petition; taxes to which debtor made a fraudulent return or willfully attempted to evade or defeat said tax;
The disadvantage is that a record of this stays on the individual's credit report for up to ten years.