Chapter 13 bankruptcy allows a person to consolidate their debt while making convenient monthly payments to a trustee. A bankruptcy attorney can help with a payment plan which repays the debt over a three to five year period. The amount of the monthly payment and the length of the repayment plan is based upon the following factors:
- Monthly income of the person
- Monthly expenses of the person
- Amount and nature of the debt
Secured debts are paid 100% on the dollar, while unsecured debts may be paid as little as 0% on the dollar. A person receives a discharge under Chapter 13 once the payment plan is completed.
The Chapter 13 Process
In Chapter 13, you must submit a plan in which you set out a budget detailing your take-home pay and monthly living expenses. Any excess income is paid to the bankruptcy trustee who then distributes money to creditors. The plan lasts for 3 to 5 years, unless your debts are fully repaid in a shorter period of time. At the end of the Chapter 13 plan, any amounts still owing on your unsecured debts are forgiven.
The most common uses of Chapter 13 involve:
- Stopping home foreclosures and paying off back-mortgage payments
- Stopping auto repossessions and restructuring auto loans to save a vehicle
Typically government debts are not dischargeable, however there are great benefits to putting tax debt into a Chapter 13 plan. Chapter 13 can freeze interest and penalties on some taxes. This gives you a chance to budget out a repayment plan in real dollars, and the payments you make go directly to reduce the principle. Most people trying to repay back taxes are fighting an uphill battle with interest and penalties working against them, but in Chapter 13, you may get a break from the government and pay off just what you owe on the day you filed the case.
You may want to consider Chapter 13 if:
- You have significant equity in a home or other property and you want to keep it
- You have regular income and can pay your living expenses, but you can’t keep up the scheduled payments on your debts
Advantages of Chapter 13:
- You can keep most of your property while spreading out time to pay past due accounts
- You’ll have 3-5 years to catch up delinquent accounts—according to a schedule that you and the bankruptcy trustee have agreed is workable for you.
- You’ll make one monthly payment to the bankruptcy trustee for distribution—you’ll have no direct contact with creditors during the protection period of 3-5 years.
- Co-signers may be protected
Who can file under Chapter 13?
- Any individual debtor whose unsecured debts are below $336,900 and whose secured debts are less than $1,010,650