Chapter 13 bankruptcy, which is often referred to as reorganization bankruptcy or wage earner's bankruptcy, is a very different process from Chapter 7 "liquidation" bankruptcy. Unlike Chapter 7, which often requires filers to surrender certain assets in order to have their debts discharged, people who file for Chapter 13 bankruptcy typically do not have to give up any of their property to get out of debt. For this reason, some people find Chapter 13 to be a more appealing approach to dealing with unmanageable debt.
What is Chapter 13 bankruptcy?
During Chapter 13 bankruptcy, debtors propose a payment plan that will allow them to pay off some or all of their debts over a period of three or five years. The length of the repayment period depends on the individual's income; people whose monthly income is below the state median will typically use a three-year plan, while higher earners usually use a five-year plan. Under the repayment plan, a person's debts are reorganized and paid off according to priority. Certain debts such as back taxes and child support are treated as high priority and are paid off sooner than other types of debt. If the individual keeps up with his or her payments, certain remaining debts can be forgiven at the end of the repayment period.
Benefits of Chapter 13
One of the major advantages of Chapter 13 bankruptcy is that it provides debtors with an opportunity to prevent foreclosure if they have fallen behind on their home mortgage payments. Chapter 13 bankruptcy stops the foreclosure process and allows homeowners to avoid foreclosure by catching up on their past-due mortgage payments during the repayment period. However, they are also required to keep up with any current payments that come due during the repayment period.
Another benefit of Chapter 13 bankruptcy is that it allows borrowers to "reschedule" many of their debts and extend them over the life of the repayment plan, which often results in lower payments.
Drawbacks of Chapter 13
Although Chapter 13 has a number of benefits over liquidation bankruptcy, it also has certain disadvantages. For instance, because the repayment period may last for up to five years, the Chapter 13 bankruptcy process generally takes much longer than Chapter 7, which can often be completed in just a few months.
Also, because borrowers must make payments toward a repayment plan, Chapter 13 bankruptcy may not be an option for people without a reliable source of income. In addition, there are limits on the amount of debt that a person may have when filing for Chapter 13 bankruptcy. To be eligible, a borrower must have less than $360,475 in unsecured debts like credit card debt and medical bills, and less than $1,081,400 in secured debts like home mortgages and vehicle loans.
Talk to an attorney
Bankruptcy law is a complicated field, and there are many variables to consider when choosing the right course of action for getting out of debt. People considering bankruptcy should speak with a knowledgeable bankruptcy lawyer who can help them weigh the options and find the best solution for their specific circumstances.