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Chapter 13 Basics

Most people only think of bankruptcy as a process in which you go to court and get your debts erased. But in fact, there are two types of consumer bankruptcies: the more familiar liquidation bankruptcy, where your qualifying debts are discharged (“Chapter 7” bankruptcy) and reorganization bankruptcy, where you partially or fully repay your debts. Reorganization bankruptcy for individuals is called Chapter 13 bankruptcy. (There are two other kinds of reorganization bankruptcy: Chapter 11, for large businesses and individuals with extremely large amounts of debt; and Chapter 12, for family farmers.) The names come from the chapters of the federal Bankruptcy Code.

Chapter 13 bankruptcy lets you rearrange your financial affairs and repay a portion of your debts. You repay your debts through a “Chapter 13 plan.” Under a typical plan, you make periodic payments to the Chapter 13 trustee for three to five years. The bankruptcy trustee distributes the money to your creditors.

Chapter 13 bankruptcy isn’t for everyone. If your total debt burden is too high or your income is too low or irregular, you may not be eligible. You may be better off handling your debt problems in another way – such as filing for Chapter 7 bankruptcy, seeking help from a nonprofit consumer counseling group, or negotiating with your creditors on your own.

For you to qualify for Chapter 13 bankruptcy, you must have “stable and regular” income. Your income must be high enough so that after you pay for your basic needs, you are likely to have money left over to make periodic (usually monthly) payments to the Chapter 13 trustee for three to five years. The total amount you must pay will depend on how much you owe, the type of debts you have, and your household income.

There are many reasons why people choose Chapter 13 bankruptcy. Generally, you may be a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:

  • You are behind on your mortgage or auto loan, and want to make up the missed payments over time and reinstate the original agreement.
  • You have a tax debt that cannot be eliminated (discharged) in Chapter 7 bankruptcy, but can be paid off over time in a Chapter 13 payment plan.
  • You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so.
  • You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future.