Chapter 13 is a creative and flexible way to deal with your debts, often much more powerfully that a Chapter 7 “straight bankruptcy” can.
A Flexible and Powerful Option
For consumer and small business owners, a Chapter 13 “adjustment of debts” is a creative and flexible method for dealing with your creditors. It gives you some extraordinary tools, ones that are not available to people using the more common Chapter 7 “straight bankruptcy” procedure.
In a Chapter 13 case, you and your attorney propose a debt repayment plan based on your budget. That plan often pays very little or even nothing to many of your creditors. At the same time it addresses and protects you from important creditors like the IRS and the state tax authority, your ex-spouse and the support enforcement agency, and your home mortgage and vehicle lenders. It protects your assets better, both those that you own free and clear, and those that are collateral on a debt.
Your Chapter 13 plan usually covers a period of three to five years. It is built around a detailed set of laws about how you can treat each kind of debt. Your creditors, and the Chapter 13 trustee who administers your case, can object to the proposed plan, but they have limited grounds on which to do so. Usually any such objections get negotiated and resolved in a matter of weeks. Or if necessary they are decided by the bankruptcy judge. Often there are no objections to your proposed plan or only minor ones. The bankruptcy judge approves, or “confirms,” the plan, which then governs the rest of your case.
At the completion of the plan, the remaining unpaid debts are usually discharged (legally written off) by the bankruptcy court, leaving you debt free (with the exception of certain debts like student loans and a voluntarily retained home mortgage).
An Option to Consider, Even If Not What You First Had in Mind
If you’re dealing with serious financial challenges, you owe it to yourself to look into filing a Chapter 13 case. On the face of it, the Chapter 13 process looks more complicated, as in many respects it usually is. But if you have one or more of the circumstances where it can help you much more than a Chapter 7 could, any such downside may be well worthwhile.
Because of how flexible Chapter 13 is, one person’s case can be very different from the next person’s. So whatever you may have heard about it, there’s a good chance that what you heard would not apply to you. Find out whether it makes sense in your unique circumstances before deciding whether it is or isn’t right for you.
What Chapter 13 Can Do
Here is a just a taste of what ONLY Chapter 13 can do:
- Gives you up to five years to catch up on a mortgage arrearage
- Pay off recent income tax debts based on what you can afford each month, while preventing any collection action from the IRS or state, and avoiding any new interest and penalties
- “Strip” a second mortgage off your home title if the home is worth no more than the first mortgage balance
- Satisfy an income tax lien on your home or other assets, often by paying nothing or much less than the amount of tax debt
- Cure child or spousal support arrearage over a period of years, while preventing the aggressive collection methods of an ex-spouse or support enforcement
- Reduce monthly payments and the total amount to be paid for a vehicle on a loan at least two and a half years old through “cramdown”
- Protect an asset that would otherwise be taken and liquidated by a Chapter 7 trustee
- Discharge (legally write off) non-support obligations to an ex-spouse
Qualifying for Chapter 13
You can file a Chapter 13 case if:
- The amount of your debts does not exceed the legal debt limits: $1,149,525 in secured debts and $383,175 in unsecured debts.
- You are “an individual with regular income”: first, only human beings, not corporations or partnerships—can file a Chapter 13 case; and second, you must have “income… sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”