What is Chapter 13 Bankruptcy
A Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over the course of three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years, unless the court approves a longer period "for cause". If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time, the law forbids creditors from starting or continuing collection efforts.
Why File Chapter 13 Bankruptcy?
There are a variety of reasons that an individual would choose Chapter 13 over Chapter 7. One reason is that your income is too great to qualify to file Chapter 7. Also, if you have more assets than you are allowed to keep in a Chapter 7, you can file Chapter 13 and keep those assets (although you will have to pay through the court an amount, at least equal to the value of those assets). Further, you may have filed Chapter 7 in the past and the required 8 years may not have passed to allow you to file another. In this event, you can file and receive a discharge in a Chapter 13 filed 4 years after your Chapter 7.
For homeowners facing foreclosure, Chapter 13 will stop the foreclosure process and will allow you to make up missed payments and fees over the life of your Chapter 13 plan. More important for some, Chapter 13 may also allow you to strip liens from your home when they are not secured by any actual equity.
How Does Chapter 13 Work?
A Chapter 13 case begins by filing a petition and repayment plan with the Bankruptcy Court. To oversimplify, these documents set forth a proposed monthly budget, which will establish how much money you have left every month after your expenses are subtracted from your income. The money left over is called “disposable monthly income”. which you will then pledge to the court’s Chapter 13 trustee for the duration of your case.
How this money is divided among your
creditors is set forth in your repayment plan. Different classes of creditors are treated and paid differently. Some must be paid in full and others need not be paid at all, in some circumstances. If
your proposed budget and repayment plan comply with the
applicable provisions of Chapter 13, it should be confirmed. Once confirmed, the Chapter 13 trustee will begin paying your creditors according to plan.
In a Chapter 13, the debtor must make payments to the Chapter 13 trustee starting during the first month after the petition is filed. For example, if a debtor files a Chapter 13 case on February 1, the first monthly plan payment should be made to the trustee on March 1. This will usually be before the first court date and before the plan is even approved. All plan payments must be made. since this shows the bankruptcy judge that the debtor can handle the payments under the plan. The trustee will send the debtor a list showing what money was collected from the debtor and paid out to the creditors. The trustee gets a small percentage of the money paid by the debtor.
After the debtor has made all payments called for in the plan and the trustee has disbursed the money to creditors, the debtor will be sent a discharge. Money is no longer owed, except for mortgages.
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