How Does Chapter 13 Work?
Chapter 13 is called the reorganization bankruptcy because it allows the debtor to reorganize their finances and get rid of those debts that are unwanted, such as credit card debts, medical bills, personal loans, and old taxes. This allows the debtor to focus on paying, and keeping, those assets that the debtor wants to keep such as a home and cars.
During the Chapter 13 process, the debtor chooses which debts to repay. If the debtor's payments are behind in these debts, Chapter 13 allows the debtor to repay the past-due amounts over 36-60 months. Also, during that time, the debtor is keeping up with the current payments on those debts. At the end of the chapter 13 period, all loans that were kept are current. Also, all other debts have been eliminated. The debtor has been able to reorganize the family's finances to fit their ability to pay.
The concept behind Chapter 13 is simple: 1) eliminate as much debt as possible, including lawsuits, judgments, and garnishments; 2) eliminate the second mortgage if possible; 3) reduce the amount owed on all car loans if possible; 4) pay the past-due amounts owed on secured debts that are kept; 5) pay the current payments every month; 6) depending on how much money is left over after paying the mortgage, past-due mortgage, cars, and all other living expenses, pay the trustee a small portion toward the debts that were eliminated. Do this for 36-60 months and the debtor has saved the home, eliminated a lot of debt, and now has a monthly budget that is affordable.