Chapter 13 Bankruptcy

Chapter 13 is a type of bankruptcy that is increasing in popularity but is not well understood by many. Unlike chapter 7 where the debtors lose their assets and immediately start over, chapter 13 allows debtors to keep their assets in exchange for adopting a court-approved “plan” to repay all or a portion of their debts out of their future income for the next 5 or more years. The debtor’s plan must provide that the debtor will pay all of his disposable income (the amount of money the debtor has left over after paying his current year’s taxes and “necessary living expenses”) to his creditors every month. It doesn’t matter how little this monthly payment is, as long as it is large enough to pay certain “priority” debts in full during the life of the plan. In exchange for successfully completing the plan, the debtor receives a discharge from all debts to the extent not paid during the plan.

Why can this be better than filing a chapter 7? Chapter 13 can be useful in several situations. It allows a homeowner facing foreclosure to keep his home, start paying the future mortgage payments on time, and repaying the back, unpaid mortgage payments (called the “arrearage”) over the plan period. It can also help if the debtor has a civil tax penalty. These penalties cannot be discharged in a chapter 7 and must be paid in full over the life of the plan in a chapter 13. But in a chapter 13, usually the penalties and interest stop which allows the taxpayer/debtor to pay the debt much faster than outside of chapter 13.

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