Definition
Chapter 13 bankruptcy, also known as a 'wage earner's plan' or 'reorganization bankruptcy,' is a legal process that allows individuals with regular income to develop a plan to repay all or part of their debts over 3-5 years. Unlike Chapter 7, this form of bankruptcy doesn't liquidate assets but instead creates a structured repayment plan based on the debtor's income and expenses. Chapter 13 is particularly beneficial for those who have valuable non-exempt property they want to keep, are behind on mortgage or car payments and want to avoid foreclosure or repossession, or have debts that wouldn't be discharged in Chapter 7. It also provides a broader discharge of debts than Chapter 7 and includes a co-debtor stay that protects co-signers for consumer debts. Chapter 13 generally remains on credit reports for 7 years from filing.
Frequently Asked Questions
How is the Chapter 13 repayment plan amount determined?
The Chapter 13 repayment plan amount is determined based on several factors: (1) Your disposable income (money left after paying necessary living expenses); (2) The value of your non-exempt assets; (3) The types of debt you have (priority debts like recent taxes must be paid in full, secured debts must be caught up if you want to keep the collateral, and unsecured debts receive whatever is left); and (4) The commitment period (3 years if your income is below your state's median, 5 years if it's above). You must pay at least as much as creditors would have received in Chapter 7.
What happens if I can't make my Chapter 13 plan payments?
If you temporarily can't make Chapter 13 plan payments due to circumstances beyond your control (job loss, medical emergency, etc.), you have several options: (1) Request a hardship modification to temporarily or permanently reduce your payment; (2) Ask for a suspension of payments for a limited time; (3) Convert to Chapter 7 if you qualify; or (4) Request a hardship discharge in severe circumstances. If none of these options work and you stop making payments, your case may be dismissed, removing bankruptcy protections and allowing creditors to resume collection activities.
Can I pay off my Chapter 13 plan early?
Yes, you can pay off your Chapter 13 plan early, but there may be conditions. If you're paying less than 100% to unsecured creditors, the court might require that the additional funds come from an exempt source or windfall (like an inheritance or insurance settlement) rather than from disposable income. If you're paying from disposable income, the court might require you to increase your plan percentage to unsecured creditors rather than completing early. The specific requirements vary by jurisdiction and individual circumstances.
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