Anatomy of a Chapter 13 Bankruptcy

  • Chapter 13 Bankruptcy

Anatomy of a Chapter 13 Bankruptcy

The Reorganization of debts in Chapter 13 Bankruptcy

When you file for bankruptcy under chapter 13, the debts are paid off through a repayment plan which is generally administered by a trustee appointed by the court. These debts need to be paid either in full or part (only in case where a discount is permitted). When you file for bankruptcy under chapter 13 (also known as the reorganization bankruptcy), you get the protection of three to five years during your repayment period from the bankruptcy court. Those who generally don’t qualify for chapter 7 Relief, chapter 13 is their only option, and it is, in fact, the best option for those who want to catch up on their mortgage and save their home from foreclosure.

Filing under chapter 13 gives you an advantage, you can keep all the properties including the non-exempted ones as well. However, the value of any such property must be paid through the repayment plan along with your disposable income. Not only this, you also have to submit the details of your finances to the court, the day you file for bankruptcy. The expenses and debts (also known as pre-petition debts- the ones incurred on and before the day of filing for bankruptcy) will be administered with your bankruptcy case.

What happens to different debts and properties in Chapter 13 Bankruptcy?

  • Car and Car Loan

Filing under chapter 13, not only helps safeguard your car but also helps in reducing the principal balance as well as the interest rates (if so permitted by the bankruptcy court). However, you need to pay off your car loan through the repayment plan.

  • Tax Debts

Certain tax debts (IRS Tax lien) may get discharged while others must be paid in full (Priority Debts) through the repayment plan.

  • Medical Bills

Medical debts must be repaid under the protection of the repayment plan.

  • Car Lease

The fate of your car lease in a Chapter 13 bankruptcy lies in the hands of the trustee (He can accept or reject it) and also whether you are falling back on your payments or not.

  • Priority, Secured and Unsecured Debts

Priority debts need to be paid first and in full. The secured debts (secured by a property) and unsecured debts (not secured by a property) must be paid through the repayment plan.

Through the repayment plan you will have to pay, a set amount of money every month to the trustee. If you will not make the payments on time, your case may be dismissed by the court. That’s why you must devise an affordable repayment plan only.

More information about Chapter 13 Bankruptcy

  • A Chapter 13 bankruptcy will potentially affect your cosigner if you have a debt with him or her.
  • A Chapter 13 bankruptcy will fix your credit score which will further help in obtaining better rates of interest and loans.
  • If you lose your job during the repayment period, you can file a petition for a hardship discharge or a modification with the bankruptcy court.
  • A cram down can be used in this bankruptcy to legally decrease the balance owed on a secured loan with respect to the real value of the collateral. This is possible only when the value of the property is less than the amount owed on the secured loan.
  • Chapter 7 bankruptcy is usually a better option for small business owners. But in certain circumstances, Chapter 13 is more beneficial.