Chapter 13 differs from Chapter 7 bankruptcy because the debtor actually repays some or all of the debt. This is accomplished using a Chapter 13 restructuring plan which provides debtors with better terms such as lower interest. Because restructuring debt involves repayment instead of discharge of debt, debtors who utilize Chapter 13 must have a regular income. Debtors work with their attorney to determine how much of their future income they can use for repayment of debt.
Debtors who file for Chapter 13 can provide input as to how their restructuring will proceed. Debtors work closely with their attorney to determine terms most favorable to their particular circumstances. The attorney drafts a written plan and submits it to the court for approval. Repayment begins about 30 days after your case is filed with the bankruptcy court, and the debtor is allowed a 3 to 5-year window in which to repay creditors. Debtors are permitted to retain all of their property. Creditors are required to follow the plan closely and cannot collect debts not outlined in the plan. The court oversees the entire process to ensure that debtor and creditor alike adhere to the terms of the plan.
Filing for Chapter 13 requires more involvement from the debtor than filing for Chapter 7. The first step is determining whether it is suitable to file for Chapter 13. As with Chapter 7, it is necessary to fully evaluate not only your debts, but also your assets, income and expenses. Chapter 13 is most appropriate for those with a regular income but who continue to have difficulty repaying debts and covering monthly expenses.
Upon deciding that Chapter 13 is a good alternative, you should create a budget you can live with. Based on this budget, and with the assistance of an attorney, you should create a Chapter 13 restructuring plan to repay your debts. Your attorney will submit this plan to the court for approval and help you with filing forms and pleadings in a timely fashion. Throughout the bankruptcy proceeding, you will be required to attend meetings with creditors and the court. Once you have made all of the payments required by the Chapter 13 plan, the plan will be terminated and all debts included in the plan will be discharged.
Filing for Chapter 13 can be powerful because it effectively stops actions such as wage-garnishment, repossession and home foreclosure. When debts go unpaid, creditors sometimes seek a judgment to begin wage garnishment. This means that a portion of your wages will go directly to repaying the creditor. Oftentimes this creates severe problems for debtors because they lose the ability to allocate their budget according to their priorities. Immediately upon filing for Chapter 13, wage garnishment ceases and creditors are relegated to receiving payments through the restructuring plan.
Home foreclosure has become a serious issue in recent times. Chapter 13 can help you avoid home foreclosure as well as vehicle repossession with what is known as the chapter 13 cramdown. As soon as you petition for Chapter 13, the court issues an automatic stay which prevents creditors from obtaining remedies such as foreclosing on your home or repossessing your vehicle. The Chapter 13 plan will then restructure your debt so that your home and car payments become more manageable. By lowering the interest and reducing monthly payments, Chapter 13 provides a way for you to catch up on your home and car payments.
To qualify for Chapter 13 your monthly income must be substantial enough to cover both the plan payments and your regular monthly expenses. In regards to mortgage payments, the Chapter 13 plan restructures payments that have fallen into arrears, but you are still responsible to pay your monthly mortgage payments outside of the plan. Regarding car payments, future payments can sometimes be included in the Chapter 13 plan, effectively lowering the total cost of your vehicle.
Individuals with excessive back taxes and child support can also benefit from Chapter 13. These debts are not dischargeable under Chapter 7 but can be worked with under Chapter 13. Chapter 13 allows debtors to eliminate interest and penalties and create a manageable payback plan. Debtors can make payments on unpaid taxes and child support over a five year period under Chapter 13. By restructuring debt in this manner, debtors can fulfill their civic and family duties.
For debtors who do not pass the Chapter 7 means test, Chapter 13 can provide a suitable remedy. Many debtors do not qualify for Chapter 7 but are in dire need of financial assistance. Chapter 13 can provide relief for such debtors, as restructuring debt might reduce monthly expenses just enough to get them back on their feet.