Chapter 13 Bankruptcy

Chapter 13 Bankruptcy – A Debt Repayment Plan

Put simply, in a Chapter 13 Bankruptcy, you pay down your debt through a court approved 3-5 year repayment plan.  In a Chapter 7, the debts are quickly discharged.

Filing Chapter 13

If you are thinking of filing a personal bankruptcy, you need to choose between Chapter 7 and Chapter 13.  Your own personal financial situation will determine which chapter is best, and this website recommends you talk to a Bankruptcy Lawyer about it.  But here are the basics on why you would file Chapter 13 over Chapter 7, starting with the most common:

Stop Foreclosure

A Chapter 13 Bankruptcy Filing will stop a pending foreclosure.  It must be filed sometime before the foreclosure auction (even the day before is ok).  But the foreclosure will only continue to be stopped if the debtor submits and follows through with a court approved payment plan.  This payment plan usually includes making regular mortgage payments, and an additional monthly payment to pay back the mortgage arrears.   So this plan only works long term if you have enough income to make it work.  Nonetheless, many people who do not have enough income still file Chapter 13 as a delay tactic to stop a foreclosure and buy some time.

Stop Car Repossession

Much like the foreclosure circumstance above, a Chapter 13 filing will prevent an auto lender from taking your car if you are behind on payments.  Sometimes if your car has just been repossessed a few days ago, you can file Chapter 13 and get the car back.  That Chapter 13 can sometimes reduce the interest on the car loan and the amount of the car payments.  Under the New Bankruptcy Law, if your car loan is more than 910 days old, you can “Cram Down” the amount you owe, which means all you have to pay back is what the car is worth, not what you originally owe!

You have non-exempt assets

If you have some assets that are not protected by the exemption laws, you would lose those assets in a Chapter 7.  An example might be a vacation home, a boat, or some stocks.  If you are not okay losing those assets, but you need Bankruptcy Protection, then you can file a Chapter 13.  In a Chapter 13 case, you usually do not lose any assets.  The court lets you keep all your assets, because you are making payments on the debt.

You have high income and fail the Chapter 7 Means Test

Most debtors that are not trying to save a house from foreclosure usually want to file Chapter 7, because it will quickly clear away their debts and give them a Fresh Start.  But to qualify for Chapter 7, you have to pass the Means Test.  This test is a complicated two part formula used to see if a debtor has the “means” to pay back their debt in a Chapter 13 Repayment Plan.  If the test shows that you can indeed afford to pay back some of your debts in Chapter 13, then you “fail” the test and cannot do Chapter 7.  In actual practice, most people that are struggling financially end up qualifying for Chapter 7.  But if your income is high and your expenses are low (you have a lot of disposable income), then you may not pass the means test and you may have to file Chapter 13 Bankruptcy.