Chapter 13 bankruptcy is one of several methods by which individuals can seek protection from creditors in the event of severe financial distress. It is considered a debt adjustment plan designed to allow investors to retain ownership of assets while dedicating future disposable income to paying off old debts.
Like all forms of bankruptcy, Chapter 13 bankruptcy laws do have some minimum requirements in order for an individual to qualify. Those requirements include:
- sufficient disposable income to make debt payments.
- secured debts of no more than $807,750.
- unsecured debts of no more than $269,250.
Choosing Chapter 13 over Chapter 7
Chapter 7 bankruptcy is far and away the most utilized form of bankruptcy for individual consumers. It provides immediate and permanent relief through the sale of qualified assets and the disbursement of proceedings to individual creditors. Once a Chapter 7 bankruptcy proceeding is completed, any outstanding debt qualified under the plan is then permanently dismissed. As simple and thorough as it sounds, Chapter 7 bankruptcy is not ideal for everyone; especially for those with valuable assets they want to keep protected.
For these types of individuals Chapter 13 is a better choice because it doesn't involve the liquidation of any assets. However, a federal bankruptcy court will review the reorganization plan filed with the petition to ensure the debtor is not shielding his own assets at the expense of his creditors. If a court determines that creditors would earn more from a Chapter 7 liquidation than through a Chapter 13 reorganization, it may order the debtor to restructure the plan or force him into Chapter 7 altogether.
Chapter 13 Bankruptcy Term
Chapter 13 bankruptcy laws dictate that the debt repayment plan will go for a period of 3 to 5 years. During that time all of the individual's disposable income will go to paying off past debts. Debts are organized in terms of priority and age, and the amount each creditor will receive will depend largely on the court-approved repayment plan. As long as the debtor makes all payments as outlined in his reorganization plan, he'll typically receive a positive discharge at the end of the term regardless of whether or not all creditors have been repaid in full. That said all creditors must be paid at least something in order for a plan to be approved by the court.
It is important to note that some types of debts cannot be fully discharged under Chapter 13 bankruptcy laws. Examples of this type of debt include tax liens not older than three years, past due alimony or child support payments, real estate mortgages, student loans, any debts incurred after the bankruptcy proceeding began, and any debts incurred through fraudulent or illegal activity. These types of debts are known as "non-qualifying" and remain the responsibility of the debtor.
Additional Facts About Chapter 13 Bankruptcy Law
Chapter 13 bankruptcy laws may differ in detail from one state to the next due to the fact that federal law does not always address specific circumstances. However, federal law can be relied upon for a general guide in how to proceed with bankruptcy protection. The U.S. Bankruptcy Court recommends that individuals in financial distress seek the advice of a credit counseling service or financial planner before deciding to file for bankruptcy. Bankruptcy carries with it some negative consequences you may not be prepared to deal with.
Also be aware that some states require consumers to attempt to utilize a debt settlement service before filing for bankruptcy. This type of service works on your behalf to help you develop a repayment plan to make good on your outstanding debts. The agency you employ will contact creditors on your behalf and attempt to work out smaller monthly payments or a reduced total debt. You may also be required to undergo consumer credit counseling through an agency approved by the federal government for that purpose.