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Chapter 13 is a section of the Bankruptcy Code which helps
qualified individuals, or small proprietary
business owners, who desire to repay their
creditors but are in financial difficulty. It is
often referred to as a "mini Chapter 11" because
you usually repay something to your creditors
and you retain your property and make payments
under a Plan.
What is the difference between a
Chapter 13 and
a Chapter 7 bankruptcy?
The main purpose of a Chapter 13 Bankrupcty, as
opposed to a Chapter 7 Bankrupcty, is to enable
a debtor to retain certain assets that would
otherwise be liquidated by a Chapter 7
Bankrupcty Trustee. In most cases, you can keep
your home and your car under either plan
(provided your equity does not exceed certain
limits). However, under Chapter 7 Bankrupcty,
you wouldn't be able to keep your rental
properties, antique gun collections, etc.
The goal of most Chapter 7 bankruptcies is to
discharge your existing debts and allow you a
*fresh start* on your finances. In other words,
once your discharge is granted, you no longer
need to repay the debts that were incurred
before you filed your bankruptcy.
Under a Chapter 13, however, you repay most or
all of your debts before your slate, so to
speak, is wiped clean. And because you repay
your debts, you gain certain advantages over a
Chapter 7 Bankruptcy.
Who can file a Chapter 13
bankruptcy?
Only an individual with regular income who owes,
on the date you file the petition, less than
$250,000.00 in unsecured debt and $750,000.00 in
secured debt. These debts must also be
noncontingent and liquidated, meaning that they
must be for a certain, fixed amount and not
subject to any conditions.
What are the benefits?
Chapter 13 Bankruptcy protects individuals
from the collection efforts of creditors;
permits individuals to keep their real estate
and personal property; and provides individuals
the opportunity to repay their debts through
reduced payments. Another benefit is that the
time your Chapter 13 bankruptcy shows on your
credit report is less, so it takes less time to
rebuild your credit.
You may be able to discharge debts in a Chapter
13 Bankruptcy that would be nondischargeable
under other Chapters, for example, fraud
judgments.
How long does a Chapter 13
Bankruptcy take to pay off?
The size of your monthly plan payments is
determined by the amount you can afford to pay
after paying necessary living expenses
(including insurance, mortgage payments, etc.).
Typically, the Plan payments last for 36 months,
unless additional time is requested, but in no
event will they last more than 60 months.
Therefore, if your payment analysis shows, for
example, that you can afford to pay $200.00 per
month (above and beyond your normal living
expenses), you would pay that each month to the
Chapter 13 Trustee, who would disperse it pro
rata among your creditors. At the end of 36
months, you are discharged from all
dischargeable unsecured debts, regardless of how
much your creditors have received.
In addition to your plan payments, you must stay
current with any ongoing obligations you have to
secured creditors, such as on your mortgage.
Chapter 13 (or any Chapter of bankruptcy for
that matter) only affects debts that you owe
on or before you filed the bankruptcy.
Therefore, on your mortgages and other secured
debts, your Plan payment goes to pay any
arrearages that existed on the date you file and
you can repay that arrearage over the life of
the Plan; but, you must stay current from the
filing date forward with any mortgage payments,
etc.
Secured debts (your mortgages) must be repaid in
full, but Chapter 13 Bankrupcty enables you to
cure the defaults (reinstate the loans) over 36
months (or up to 60 months with creditor consent
and court approval). You also have the ability
to eliminate junior liens from your real
property (your mortgages) under certain
circumstances and restructure mortgage and other
payments.
OK, what are the disadvantages?
If you miss any payments at all
that are due under your Plan, your case will be
dismissed by the Court.
What's the hit on my credit?
The bankruptcy will appear on your credit
report for 7 years after you file. This means
you will only have 4 years left with this on
your credit report-- a big advantage over a
Chapter 7 Bankruptcy. Other accurate negative
reports on your credit must be removed after
seven (7) years (like late payments on credit
cards, foreclosures, etc.). Your credit will
most definitely be less damaged than had you
completed a Chapter 7 Bankruptcy. The usual
limitations will apply until the bankruptcy
disappears off of your report: You will not get
as high a credit limit as you once had nor will
you be able to borrow a large sum of money. But
getting some credit (such as a secured credit
card) shouldn't be that difficult and you will
be able to rebuild your credit over time. What
you will likely face is higher interest rates,
required higher down payments, more points, etc.
But you will be treated more leniently than a
person with a Chapter 7 Bankruptcy. For
instance-- mortgage lenders will give you the
benefit of the doubt, giving you preferred
credit status over those filing Chapter 7
Bankruptcy.
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