Chapter 13 Bankruptcy

Chapter 13

      Chapter 13 Bankruptcy is what is known as reorganization bankruptcy. Chapter 13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep as well as to those who want to forestall a foreclosure or repossession of property. It is only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable living expenses with some amount left over to pay off their debts.

     The debtor will file a bankruptcy petition that includes schedules of the debtor's assets and liabilities. Then the debtor will have a limited amount of time to file a repayment plan with the court. Once the plan is filed, the person's creditors and the Chapter 13 bankruptcy trustee will have a limited amount of time to object to the plan. If there are no objections and the plan is confirmed, the debtor and the creditors are bound by it.

     If a debtor wants to keep secured property, but has fallen behind on payments, Chapter 13 bankruptcy allows the debtor to keep the property and get caught up on missed payments during the reorganization. For example, a debtor who is facing a foreclosure for failing to make several mortgage payments can halt the foreclosure by filing for Chapter 13 bankruptcy. The court orders what is known as an "automatic stay", preventing creditors from taking any collection actions pending the outcome of the bankruptcy proceeding. The debtor can then use the reorganization period to get caught up on past due amounts, thereby avoiding foreclosure. If the debtor is unable to get caught up on payments during this period, he will still be subject to foreclosure at the end of the reorganization.

     For secured property with a value that is less than the amount of the debt that is owed, there are 2 options: The debtor may return the property to the creditor who will be able to sell it and keep the proceeds to satisfy the debt. Any excess debt that is not satisfied through the sale of the property will become unsecured debt. If the debtor keeps the property, the reorganization plan will require the debtor to repay the debt up to the value of the property. The excess amount of debt will be converted to unsecured debt.

     The difference between secured and non-secured debts is the order in which they are repaid. Secured debts have a priority over non-secured debts. Non-secured creditors share whatever amounts are left over after priority claims have been satisfied. In a Chapter 13 bankruptcy, some of the debtor's payments will go to unsecured creditors. The unpaid portion of the non-secured debts will be discharged at the end of the reorganization period.