The decision to file bankruptcy is never easy and during this time most people are met with a high level of uncertainty. Most bankruptcies filed in the United States are either Chapter 7 or Chapter 13 cases. Determining which one is right for you is based on a variety of factors, including assets, debts, income level, and your financial goals. Meeting with an experienced bankruptcy attorney will help you determine which one is right for you.
What Is Chapter 13 Bankruptcy?
Chapter 13 is a reorganization bankruptcy designed for individuals with a steady income that can pay back at least a portion of their debts through a repayment plan. People who don't qualify for a Chapter 7 often qualify for Chapter 13 bankruptcy. If your income is irregular or too low, it may not be feasible to file for Chapter 13. In Chapter 13, you get to keep all of your property, including nonexempt assets. In turn, you pay back a percentage of your debts through a repayment plan.
Filing for Chapter 13 bankruptcy:
- Will stop almost any lawsuit (including the foreclosure process) in its tracks
- Will stop your wages from being garnished
- Will stop creditor harassment
- May provide an opportunity to obtain a mortgage modification
- Allows for one monthly payment to the trustee (only what you can afford)
- Can discharge your debts (a fraction of what was initially owed)
The Chapter 13 Reorganization Plan
The most important part of your Chapter 13 paperwork will be the reorganization plan. Your reorganization plan will demonstrate to the court, the Chapter 13 bankruptcy trustee, and your creditors how you will resolve your debts.
In bankruptcy, we deal with three classes of debts:
- Unsecured priority: Priority claims include—but are not limited to—alimony, child support, and some tax debts. These must be paid over the life of the plan.
- Secured non-priority: Secured creditors hold collateral to make sure the loan is repaid. If you want to keep the property, you must demonstrate you can pay for it.
- Unsecured non-priority: These creditors consist of medical bills, personal loans, credit cards, etc. They are at the bottom of the list and are the first ones on the chopping block if any creditors are not going to get paid.
Each Chapter 13 plan must deal with each category of debts a consumer has and must be in conformity with the bankruptcy code.
Chapter 7 vs. Chapter 13
Chapter 7 is designed to help the honest but unfortunate debtor discharge all his or her dischargeable debts. The debtor must first qualify by passing the means test. Assets not claimed as exempt are subject to liquidation by the bankruptcy trustee. Once those assets are liquidated, the trustee uses that money to pay the creditors.
Chapter 13 bankruptcy is known as a reorganization bankruptcy wherein a debtor proposes a plan of reorganization. The plan demonstrates to all the debtor's creditors how their claims will be treated under the plan. Creditors can object to their treatment if they believe they are being treated unfairly. The person filing Chapter 13 must also be able to fund the plan, usually with future wages earned after filing.
There are many reasons why an individual would file Chapter 13 rather than Chapter 7. At The Dellutri Law Group, PA, we believe you should never go through the bankruptcy protection process alone and that consulting an experienced bankruptcy attorney is a vital part of the bankruptcy process.
How Long Will My Reorganization Plan Last?
This depends on your individual circumstances and a few other factors. Your reorganization plan can be anywhere from three to five years, depending on your average monthly income over the six months prior to the date you filed for bankruptcy.
Contact the Dellutri Law Group today for a free consultation.
