Filing Chapter 13 Bankruptcy Guide

Filing Chapter 13 bankruptcy can sometimes become a necessity for families because of extensive debt and other circumstances. Having the right information concerning this option is critical to your financial future.

There are two basic types of bankruptcy for individuals, Chapter 13 and Chapter 7. In Chapter 13 bankruptcy, the debtor keeps his property but makes payments towards his or her debt over a three to five-year period, unlike Chapter 7 bankruptcy where most of the debtor’s debts are cancelled in return for a portion of property. It is often called "reorganization" bankruptcy.

It allows you to lower your debt payments to affordable levels. Because Chapter 13 requires you to use your income to repay some or all of your debt, you must have a regular income and prove to the court that you can afford to make payments; otherwise, the court will not allow you to file for Chapter 13 bankruptcy.

Filing Chapter 13 Bankruptcy: Getting Started

Before you are allowed to file for bankruptcy, you must attend credit counseling from an approved agency that may charge you a fee for credit counseling services. You will also have to pay the filing fee and then file additional forms.

The most important component of this paperwork will be your repayment plan. This plan will describe in detail how you plan to pay each of your debts. Most courts design their own plan due to the fact that there is no official plan available. This plan must be approved by the bankruptcy court.

Chapter 13 bankruptcy payment plans must include payment of certain debts in full. These debts are known as “priority debts,” and they will include alimony and child support, your employees’ wages, and some types of tax obligations.

Your repayment plan must also include your regular payments on secured debts, such as a mortgage or car loan, as well as the repayment of the amount by which you may have fallen behind in your payments.

Filing Chapter 13 Bankruptcy:  Your Repayment Plan

The length of your repayment plan depends on how much money you earn and how much money you owe. During your repayment period, if for some reason you cannot make your payments, due to job loss, for example, the court might let you discharge your debts on the basis of hardship. If you are not allowed to modify your plan or receive the hardship discharge, the other option might be to convert to a chapter 7 bankruptcy.

Any remaining debts that are qualified for discharge will be wiped out once you have completed your repayment plan,. However, before you can receive a discharge, you must first show the court you are current on your child support and/or alimony payments and that you have completed a budget counseling course with an approved agency.

Pros and Cons

There are important things to remember about Chapter 13 bankruptcy. This bankruptcy option can be applied to stop a house foreclosure, make up missed payments, and keep the house. It also stops creditors from harassing you.

The court requires you to live on a strict budget and not spend money on anything nonessential, so you can expect quite a few lifestyle changes.

Lastly, Chapter 13 may remain on your credit file for up to ten years, but you can try to improve your credit after your case is over.

Compared to Chapter 7, filing for Chapter 13 bankruptcy is more demanding on the person filing; therefore, a good bankruptcy attorney can help you decide whether filing Chapter 13 bankruptcy is the right option for you based on what you could lose under Chapter 7 bankruptcy.