Chapter 13 Bankruptcy

Chapter 13 may be thought of as a court-approved debt consolidation plan. Officially it is referred to as Adjustment of Debts of an Individual With Regular Income. The idea is to consolidate all debts into one monthly payment, which is paid to the trustee. The trustee then distributes the money to the creditors in an extended deferred payment plan. As long as the debtor is in Chapter 13 the creditors are barred from attempting to collect the debt directly from the debtor. And, as long as the debtor makes his payments, his assets remain under his control (even non-exempt assets). This type of bankruptcy was established to encourage debtors to pay their debts while receiving the protection of the automatic stay. It is ideal for debtors who just need time to pay their debts. Specifically, it is an excellent method for a small business to retain its assets and keep operating as usual, while paying off debts through the Chapter 13 plan. It is also helpful to debtors who have large non-dischargeable debts. These debts cannot be erased in a Chapter 7, and the debtor needs time in order to pay them off.

Another advantage of Chapter 13 is that, in a great many cases the court will erase, or discharge, a substantial portion of the debt altogether, thus combining the discharge benefits of a Chapter 7 with the payment plan features of the Chapter 13. Chapter 13 does not require the approval of the creditors. As long as the debtor is acting in good faith, is paying all of his disposable income into the plan, and as long as general unsecured creditors receive at least as much as they would have received had the debtor filed a Chapter 7 instead, the court will approve the plan regardless of creditor objections. Only individuals, families or sole proprietorships are eligible for Chapter 13. Partnerships or corporations are not eligible for this remedy. And, only those individuals or families with liquidated secured and unsecured debts under a certain amount are eligible. Unlike Chapter 7 which limits the taxpayer to one filing every six years, there is no such limitation for Chapter 13. Accordingly, a debtor may file repeat Chapter 13 cases, or file a Chapter 13 immediately after filing a Chapter 7 (sometimes called a "Chapter 20"). This privilege presumes, however, that the debtor is acting in "good faith"; if the court determines that the debtor is unfairly attempting to exploit the Chapter 13 protection it may dismiss the case. Your lawyer should guide you toward the best choice.