Chapter 13 Basics
For those individuals who don't qualify for Chapter 7 bankruptcy, or need the advantages that chapter 13 provides, Chapter 13 provides them with more ability to restructure their debts to fit their budget than Chapter 7. Chapter 13 is called the reorganization chapter because debtors have more flexibility in arranging their finances than Chapter 7. An overview of the Chapter 13 process is discussed below. The process of Chapter 13 is discussed in more detail here.
Chapter 13 takes between 3-5 years to complete. During this time, debtors in Chapter 13 are required to pay some portion of their unsecured debt to the trustee in the form of a monthly payment. The amount of this monthly payment is based on the debtor's income, not the amount of debt. To establish the amount to be paid, the debtor submits a "Plan" of repayment to the court for approval. Usually, the "Plan" payments are less than the debtor owes the unsecured creditors. After all payments in the "Plan" are made, the debtor receives a discharge of the unpaid debt that is dischargeable. Remember, not all debt is dischargeable. For non-dischargeable debts, Chapter 13 provides the debtor up to 5 years to repay them within the protection of bankruptcy. For more info, click here.
A big advantage of Chapter 13 is that Chapter 13 debtors are given up to 60 months to make up past-due payments on loans secured by property that the debtor wants to keep. For example, if the debtor is 12 months behind on house payments, the debtor can force the lender to allow the debtor to pay the past-due amount over 60 months. Try getting a lender to agree to that outside of bankruptcy. Another big advantage of Chapter 13 is the ability to eliminate second mortgages on the underwater property. If the debtor's primary residence is worth less than the first mortgage, Chapter 13 allows the court to eliminate the second mortgage and make it like a credit card debt. The debtor gets to eliminate a substantial debt on the house forever.
Another advantage of chapter 13 relates to debts that are not dischargeable. Some debtors like to use Chapter 13 to pay off taxes and court-ordered obligations without incurring any further penalties. Generally, taxing authorities and courts do not grant 60 months to pay off these obligations. For example, even with a tax debt that is not dischargeable, the debtor can have up to 60 months to pay off the tax without incurring any penalties from the taxing authority and without permission from the taxing authority. This can save the debtor substantial sums of money.