Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is the reorganization chapter in the Bankruptcy Code, which allows individuals to catch up on debts they owe creditors by paying under a “reorganization plan” approved by the Bankruptcy Court. Individuals often file a Chapter 13 bankruptcy because they are not eligible for a Chapter 7 bankruptcy.
A Chapter 13 bankruptcy is designed to allow individuals to retain their property (real estate, cars, etc.) and pay back some, or all, of their debts over a 3 to 5 year period. Under the Bankruptcy Code, the amount of time permitted to pay back debt is determined by the amount of the debtor’s income. As part of initiating a Chapter 13 bankruptcy, a reorganization plan is filed. This reorganization plans lists the proposed manner in which debts will be paid back. For example, a debtor may include a proposal in a reorganization plan to cure all “arrearages” (owed payments) on a mortgage, car loan, tax, or domestic support obligation such as alimony and child support. In addition to paying back debt owed, a Chapter 13 bankruptcy has other benefits such as a “cramdown” (reducing the principal balance on a car loan to the value of the car, or reducing the balance of a mortgage secured against rental property to its value) and “lien stripping” (removing a junior lien from your house).
Once a reorganization plan is filed, your creditors and a Chapter 13 trustee assigned to your case will examine the plan and either consent or object to your proposal. If no objections are made, or objections are resolved, the Bankruptcy Court will approve your reorganization plan, and usually you must make monthly plan payments to a Chapter 13 trustee. The trustee will be in charge of monitoring your periodic payments to creditors. Most of the time, you will be responsible for continuing to pay your ongoing monthly mortgage payments, while the trustee will use your plan payments to pay off the arrearages owed on the mortgage.