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What is Chapter 13 bankruptcy?

A Chapter 13 bankruptcy allows you to reorganize your debt load and arrange to repay your creditors over an extended period, usually three years, but in exceptional circumstances, up to five years. A Chapter 13 bankruptcy is normally undertaken when you have certain assets you wish to keep that are not protected from seizure under either the federal or state exemption laws.

You must be employed to declare a Chapter 13 bankruptcy and intend to repay your debt.

How do you file for it?

The first step is to file a bankruptcy petition that lists your assets and liabilities. As soon as you do this, a stay of action is put into place and your creditors can no longer pursue you for debt repayment.

Then, you must also submit a repayment plan for your debts, which includes a listing of all your ongoing expenses (mortgage or rent, car, utilities, food, etc.). This repayment plan is sent to the creditors, who might disagree with it. If creditors do not object, however, the plan is put into place, and both debtor and creditors are bound to it.

There is also a confirmation test that must take place. This test ensures that creditors receive at least the same amount under the Chapter 13 bankruptcy as they would under a Chapter 7 claim. Another test is that the debtor must put all disposable income toward paying off debts.

Under certain conditions (and for a fee) a Chapter 13 bankruptcy can be converted to a Chapter 7 bankruptcy (and vice versa). You cannot flip flop back and forth between these bankruptcies, but if you undertake proceedings and realize another one might be more advantageous, you do have options.

What are the advantages and disadvantages?

The biggest advantage for Chapter 13 bankruptcy is that it allows you to retain your assets, some of which might be important to you. For example, if you have fallen behind in your mortgage payments, a Chapter 13 bankruptcy can give you an opportunity to catch up, and avoid foreclosure on your property. Although you must pay all of your debts up to the date of filing bankruptcy, a Chapter 13 repayment plan often means you repay less than you owed.

A Chapter 13 bankruptcy is available to you only if you have a regular income, have less than $269,250 in unsecured debt (such as lines of credit or credit cards) and less than $807,750 in secured debt (your vehicle or home).

Bankruptcy Basics

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