A Chapter 13 bankruptcy is a debt adjustment or restructuring process. Creditors are paid from the proceeds of the Debtor’s Chapter 13 plan and not from a sale of non-exempt assets. A Chapter 13 filer does not lose assets. Instead the filer(s) submit a Chapter 13 payment plan to the court. The payments are monthly and must continue for at least three years but not more than five. Payments are distributed to Creditors as the plan progresses. A bankruptcy discharge is not granted until after all payments have been made. A Chapter 13 filer does not necessarily pay 100% of what is owed. Generally, the total paid will be a reduced amount of the total debt.
A Chapter 13 filer must at a minimum pay the amount of money creditors would have received had that same debtor filed a Chapter 7. This is called the ‘fairness to creditors rule’. Once that amount is established the Court examines the debtor’s income and expenses and can increase payments if it is determined the debtor can pay more. This is called a ‘means test’. Finally, a debtor cannot be required to pay creditors who do not file claims.
There are advantages and disadvantages to both types of bankruptcy. A Chapter 13 filing will allow a debtor to cure past due car or house payments. It may be used to lower car payments or payments on investment properties. Unpaid income taxes can be paid in the plan and interest and penalty amounts discharged. Since a Chapter 13 filing can be dismissed, it offers protection to an individual whose difficulties are temporary and whose debts can be paid in full at some point in the plan period.
The decision regarding the type of bankruptcy that should be filed is very important and should be done only after discussions with your attorney. But generally:
You should file a Chapter 13 bankruptcy if:
Your household income is over the median income for same size household and you cannot rebut a presumption of abuse.
You have non-exempt assets you wish to keep but cannot re-purchase in 12 months.
You are behind in car or house payments and wish to keep these assets and bring payments current.
You wish to modify a mortgage or seek lower car payments.
You may wish to dismiss the bankruptcy at a later time.
A Chapter 13 filing is generally more complicated and expensive that the Chapter 7 filing. It also is quite lengthy, lasting from three to five years. A Chapter 7 filing is usually over in four to five months.
Gregory N. Burns is a Bankruptcy Attorney Helping people file Chapter 13 bankruptcy in Cape Coral, Lehigh Acres, Fort Myers.