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What is Chapter 13 bankruptcy and how does it work?


Two of the most common types of personal bankruptcy are Chapter 7 and Chapter 13 bankruptcy. Unlike a Chapter 7 bankruptcy, where a debtor's non-exempt assets are liquidated and the proceeds used to pay off creditorys, Chapter 13 filings allow individuals with regular incomes to create a three- to five-year repayment plan to eliminate their debts, subject to the approval of the court. During this time, creditors are not allowed to continue with or begin new collection efforts.

The advantage of a Chapter 13 bankruptcy is that it may enable people to save their homes from foreclosure as well as protecting cosigners on loans. Other secured debts may also be involved in a repayment plan where debt is consolidated and, in many cases, the terms of the plan reduce an individual's total monthly payments to creditors.

When an individual decides to file for Chapter 13 bankruptcy, they must turn over a variety of financial and tax documents to the court as well as a certificate of completion of the required credit counseling program. If a repayment plan has been created through counseling, this is also to be given to the court. Along with financial records, those filing must also provide a complete list of creditors and a detailed accounting of what is owed. A trustee will be appointed to the case, and this impartial party will oversee the bankruptcy, collect payments and distribute them to creditors.

Filing for Chapter 13 can enable an individual to get out from under a large amount of debt within a few years, but the process can be complex. A bankruptcy attorney will describe the eligibility requirements of Chapter 13 as well as explore other possible methods that the client can use to deal with these financial obligations.

Source: United States Courts, "Individual Debt Adjustment", September 19, 2014