As I mentioned in my post on Chapter 7 bankruptcy, people are often hesitant or fearful when considering whether to file for bankruptcy protection.  Fortunately, Congress has given plenty of thought to this topic and has come up with an array of solutions for debtors in varying situations.  One of these solutions – chapter 13 bankruptcy – may offer you the chance for meaningful debt relief. 

The title of Chapter 13[i] is “Adjustment of Debts of an Individual with Regular Income” and it gives a fairly clear indication of the story that chapter 13 tells: (i) debts are not eliminated, but adjusted; and (ii) this form of bankruptcy relief is for individuals with regular income, meaning those whose “income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13…”.[ii]  If you’re an individual with a steady job or you operate a business, and you’re unable to keep up with your debts, chapter 13 enables you to file a repayment plan with the bankruptcy court.  If approved, the plan will allow for the adjustment of your debts and a discharge of any dischargeable debts remaining after you fulfill the plan’s requirements.

 It is this creation of a payment plan as a condition of discharge that distinguishes a chapter 13 bankruptcy from one under chapter 7,[iii] since the focus is on reorganization of the debtor’s finances rather than on liquidation of non-exempt assets.  Depending on whether the combined monthly income of the debtor and his/her spouse is less or greater than the annualized State median income for the applicable family size, the plan will provide for payments stretching over no longer than 3 or 5 years, respectively.[iv]  Generally, the debtor must pay all priority claims in cash, in full, except under narrowly drawn circumstances.[v] 

The debtor generally retains control over her assets, called “property of the estate”[vi] and may request dismissal of the case at any time before it has been converted to a case under chapters 7, 11 or 12.[vii]  However, the case can (and probably will) be dismissed or converted to one under chapter 7 if the debtor fails to fulfill the requirements of the Bankruptcy Code dealing with filing of information and/or good faith conduct.[viii] 

Most important for many debtors, chapter 13 may be used to cure a default in payment of a mortgage securing a debtor’s principal residence and to provide for payments to the mortgagee under the plan, even when the plan expires before the final payment date of the mortgage note – in other words, you can save your home![ix]  In this respect alone, chapter 13 may be the preferable choice for many homeowner-debtors and is almost always a better solution than the promises made by “loan modification” services. 

In short, a chapter 13 bankruptcy is a court-supervised workout of your debts which, if followed completely, results in the discharge of any remaining dischargeable debts upon successful completion of a 3- or 5-year plan.  Because loan modifications are successful only about 14 percent of the time, and because there is often a large up-front fee payable to the “loan modification service,” a chapter 13 proceeding may offer the best and most secure opportunity for an adjustment of debts and retention of the debtors assets – particularly his home.

[i] 11 U.S.C. §§ 1301 et. seq.

[ii] 11 U.S.C. § 101(30).

[iii] 11 U.S.C. § 1321.

[iv] 11 U.S.C. § 1322(d).

[v] 11 U.S.C. § 1322(a).

[vi] 11 U.S.C. § 1306.

[vii] 11 U.S.C. § 1307(b).

[viii] 11 U.S.C. § 1307(d).

[ix] 11 U.S.C. §§ 1322(b), (d).

Bookmark It

Hide Sites