Bankruptcy

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan.pla Compare the goal of Chapter 13 with the relief contemplated in Chapter 7 that offers immediate complete relief of many oppressive debt(s).

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An individual who is badly in debt can file for bankruptcy either under Chapter 7 (liquidation or straight bankruptcy) or under Chapter 13 (reorganization). The choice is not a coin flip. The appropriate chapter depends on the situation. The debtor’s disposable income and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13 as he or she cannot if he or she simply lacks the disposable income necessary to fund a viable Chapter 13 plan (see below).

Under Chapter 13 the debtor proposes a plan to pay his creditors over a 3 to 5 year period. During this period his creditors cannot attempt to collect on the individual’s previously incurred debt except through the bankruptcy court. In general the individual gets to keep his property and his creditors end up with less money than they are owed.

The disadvantage of filing for Personal Bankruptcy is that a record of this stays on the individual’s credit report for 10 years. During the pendancy of a Chapter 13 case the debtor is not permitted to obtain additional credit without the Chapter 13 Trustee’s permission. Moreover creditors may not be willing to risk lending money to such an individual. However this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case or those who are in or have recently been in a Chapter 7 case.

The advantages of Chapter 13 over Chapter 7 include the ability to stop foreclosure to achieve a super discharge of debts of kinds not dischargeable under Chapter 7 to value collateral to bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for or are over-secured or both and in some cases to prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.

A Chapter 13 Plan is a document filed with or shortly after a debtor’s Chapter 13 bankruptcy petition. The plan details the treatment of debts liens and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition filed in United States Bankruptcy Court. For the plan to be confirmable it must at a minimum (actually there are more requirements and these vary from state to state) meet all of the following tests:

  • Commit every penny of the debtor’s household’s disposable income to the Chapter 13 Plan for at least three years (unless a 100% repayment of all unsecured debt will occur in less than three years) or up to five years but longer than three years only if the debtor elects it.
  • Provide that unsecgured creditors will receive at least as much through the Chapter 13 Plan as they would in a Chapter 7 liquidation.
  • Provide a meaningful payback to the unsecured creditors. In some districts and divisions this means as little as a one cent on the dollar payback. In others it may be as much as twenty cents on the dollar.