Chapter 13 bankruptcy is the chapter of the bankruptcy code that provides for the adjustment of debts of an individual with regular income. A Chapter 13 bankruptcy will allow a debtor to keep his or her property and pay down debts over a period of time, usually from three to five years.
A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts.
Under a Chapter 13 bankruptcy, the debtor proposes a repayment plan that calls for installment payments to creditors over three to five years. If the debtor’s current monthly income averaged over the last 6 months is less than the applicable state median, the Chapter 13 plan will be for three years unless the court approves a plan lasting longer.
When the debtor’s current monthly income averaged over the last six months is greater than the applicable state median, then the Chapter 13 Plan usually must last for five years. A Chapter 13 plan can never be proposed that lasts for longer than five years. During the time the case is active the law prohibits creditors from starting or continuing collection activity.
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7 bankruptcy. Perhaps most significantly, chapter 13 bankruptcy offers individuals an opportunity to save their homes from foreclosure.
By filing a Chapter 13 bankruptcy an individual stops foreclosure proceedings, and can then make payments over the life of the plan that cure past-due delinquent payments. However, the Chapter 13 filer must still make the regular monthly mortgage payments while the Chapter 13 is active.
Another nice advantage of Chapter 13 over Chapter 7 is that individuals are allowed to reschedule secured payments (other than real property) and extend them for the life of the bankruptcy plan. This often lowers payments dramatically.
Chapter 13 bankruptcy also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Also, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 bankruptcy protection.
