How Does a Chapter 13 Bankruptcy Work?

A chapter 13 bankruptcy is a plan where you pay back a portion or all of your debt through a three to five year payment plan. How much debt you have to pay back depends on they type of debt you have, your income, and how much debt you can afford to pay.

The Amount you will have to pay in your Chapter 13 Plan

To figure out your plan payment you will fill out a worksheet that goes over all of your monthly expenses. Any money you have left over after you calculate your expenses, will go to the payment. This is called your disposable income. If your income is below the state’s median income, you can propose a three year payment plan. However, if your income is above your state’s median income, you must be in a five year repayment plan unless you are paying back all of your debt.

If your Income increases after the plan is confirmed

The idea of a chapter 13 bankruptcy is all of your disposable income will be used to pay off your creditors. If your income increases after the plan is confirmed the chapter 13 trustee, under certain circumstances, can request the court to increase your plan payment.

Reasons to File a Chapter 13

Although a Chapter 7 bankruptcy is more common, there are instances where filing a chapter 13 may be more advantageous:

  • You may be able to discharge a second mortgage on your house, called “lien stripping.”
  • Ability to reduce the collateral on a secured to debt to the value of property under certain circumstances. For example, if you owe $8,000 on a car worth $3,000, you may be able to reduce the amount you owe to $3,000.
  • You can make up for missed payments on a house or car (called arrears) through the three to five year plan. This is how bankruptcy can stop a repossession or foreclosure.
  • There are certain types of debts that can be discharged in chapter 13 that can’t in a chapter 7, such as debts owed in a divorce settlement.
  • If you own a business you may be able to keep it open during the bankruptcy
  • If you filed a previous chapter 7 bankruptcy you can’t file another chapter 7 for eight years; whereas you can file a chapter 13 after only 4 years.
  • You can protect property from your creditors that you might not be able to protect in a chapter 7.

Debts that can be Discharged in Chapter 13

For the most part, credit cards, medical bills, legal debts, court judgments, foreclosure or repossession deficiencies, overdraft fee’s, and personal loans can be discharged in bankruptcy.

Debts That can’t be Discharged in Chapter 13

You cannot discharge the following types of debt in your bankruptcy plan:

  • Fines and restitution imposed by the courts
  • Back child support or alimony
  • Student Loan deficiencies
  • Recent back taxes
  • Taxes that have not been filed
  • Any debts caused by your malicious acts or any debts you accrued from a drunk driving accident.

How a Chapter 13 Bankruptcy Ends

To successfully complete a chapter 13 bankruptcy requires you to live a very disciplined lifestyle for the duration of the plan. The trustee expects you to live within the means of the plan. One benefit of successfully completing a chapter 13 is you will be able to build your credit faster than you otherwise would have from a chapter 7.

During your three to five year payment plan all of your disposable income is used to pay back a portion of your debt to your creditors. If you are successful at making your payments, the rest of the dischargeable debt you owe at the end of your chapter 13 will be discharged.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy under the bankruptcy code.