What is Chapter 13 Bankruptcy? Chapter 13 Bankruptcy Explained
written by: Patricia Tokar, CPA•edited by: Donna Cosmato•updated: 6/29/2011
Chapter 13 bankruptcy, also known as "reorganization" is a plan in which a repayment structure is put into place. This repayment plan extends three to five years with specific payment amounts based on each individual's own ability to pay. Let's take a closer look at Chapter 13 Bankruptcy
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How Are Payments Determined
Chapter 13 bankruptcy can be a tricky process since different variables are taken into account. In the most simplistic of terms, the repayment plan for most individuals is based on their income and the balance owed on all outstanding accounts that are included in the filing. The court will then determine the amount that unsecured lenders would have the chance to be paid if the individual had filed for Chapter 7 bankruptcy.
Reorganization involves the debtor creating a written plan for their repayment plan. This plan includes what payments will be made to which creditors and will include the timeframe to pay back debts within the three to five year period. It will also take into consideration any expenses that the debtor may have and their income, all of which is outlined by the debtor.
The court will ultimately approve a written declaration of debts, income, and payments and may choose to adjust that declaration as they see fit.
Ultimately, the process does require quite a bit of paperwork, and it is suggested that you contact a bankruptcy lawyer to help ensure the proper filing procedures are followed.
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What Protection Does It Offer?
Once the court approves an individual's filing, their creditors are barred from attempting to collect any additional payments from the debtor in regard to any debt included in the debtor's bankruptcy filing.
Chapter 13 can also help a debtor keep their property while paying back less on their outstanding debt than they would have paid had they paid off the entire amount of debt owed.
Reorganization is also an excellent plan for individuals that may be trying to save their homes from foreclosure as it will allow them to fix delinquent mortgage payments over a set scheduled amount of time. During the proceedings, their foreclosure status is also "frozen," which may in itself provide enough time to pay back outstanding balances.
Another advantage is in many cases the co-signer of loans is protected for consumer debts, which can help ensure the debtor's co-signers are left unscathed.
Finally, the program is filed as a consolidated loan type. This means the debtor only makes one payment to a bankruptcy trustee who then pays all involved parties. This means the debtor does not have to deal with hostile collectors and agencies they have fallen out of good grace with.
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While the protections of Chapter 13 filing are typically the main selling points for most individuals, this plan does come with some disadvantages for certain users.
First, in order to obtain any new lines of credit the debtor needs to receive permission for the court which handled their bankruptcy. This can limit an individual, even if they have made regular payments for years on their debt.
Second, the debt from chapter 13 is shown on the filer's credit report for 10 years from the date of their case, another obstacle for obtaining new credit.
Finally just like any other bankruptcy filing, it may become harder to obtain new lines of credit in general depending on the company you are attempting to receive credit from.