Chapter 13 Bankruptcy: An Overview

Learn about Chapter 13 bankruptcy and how it can protect your property, eliminate debts and reduce your monthly bills.

If you have fallen behind on your mortgage, car payments, or owe back taxes to the government, a Chapter 13 bankruptcy may be your best option to get caught up on these obligations and reorganize your debt. Chapter 13 bankruptcy is the only option for some debtors because their income makes them ineligible for Chapter 7 bankruptcy.

What is Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is designed to let you keep all of your property and pay back some or all of your debt over a three to five year period. It allows you to cure all of your arrearages (payments you have fallen behind on) on your mortgage, car loan, taxes, or domestic support obligations (such as alimony and child support). Further, a Chapter 13 bankruptcy has many other benefits you may be able to take advantage of such as a “cramdown” (reducing the principal balance of your car loan to the value of the vehicle) or “lien stripping” (removing your second mortgage lien from your house).

How Does It Work?

In a Chapter 13 bankruptcy, you propose a repayment plan to pay back your creditors. Then you make monthly payments to a bankruptcy trustee who pays your creditors on your behalf. Your plan will detail which debts and how much will get paid.

What Happens to Your Debts and Property?

Some debts must be paid in full through your plan because they are deemed to be "priority" debts (if the creditor agrees, you may be able to pay part through the plan and then owe the rest at the end of the plan period). The most important priority debts include back child support, alimony, and certain taxes.

What about your mortgage and car loans? You can choose to surrender any of your houses or cars in your Chapter 13 bankruptcy and you will not be required to make any further payments on them. However, if you wish to keep your house, you must pay your mortgage arrearages in full through your plan. You must also keep current on your monthly mortgage payments throughout the repayment period. In some districts, you may be required to make these your ongoing mortgage payments through your plan as well. In others, you can make the payments outside the plan. But this is not required everywhere.

If you want to keep your cars, you will usually be required to pay them off through your bankruptcy plan. However, depending on where you live, you may be able to exclude your car loans from the plan and make your monthly payments directly to the lender outside of the bankruptcy if your car is worth more than you owe on it.

What about credit cards, medical bills, and other unsecured debt? Most other obligations such as credit card debt and medical bills fall into the "non-priority unsecured debt" category in your bankruptcy. These debts usually do not have to be paid in full in your bankruptcy.

In the bankruptcy, these debts are all lumped together. The creditors receive a certain percentage of what they are owed after all priority and secured debts (where a creditor has a right to take back the collateral if you stop making payments on your obligation such as a mortgage or car loan) are paid. The percentage depends on your disposable income left over after paying your priority and secured debts and can range from 0% to 100%. Most Chapter 13 debtors end up paying only a small percentage of what is owed to their non-priority unsecured creditors.

What Happens at the End of a Chapter 13 Bankruptcy?

When you have completed all of the payments under your bankruptcy plan (which usually takes between three to five years), then all of your priority debts, mortgage arrearages, and cars will be paid off. What but happens to your non-priority unsecured debts? Your unsecured nonpriority creditors They receive a portion of what is owed to them based on the percentage specified in the plan and any remaining amounts are discharged (which means your personal liability is cancelled) at the conclusion of the bankruptcy.

Who is Eligible to File a Chapter 13 Bankruptcy?

You may file a Chapter 13 bankruptcy if you are an individual with enough regular income to show that you can afford to make your plan payments. But, if you have too much debt then you may be ineligible to file. Currently, you are limited to $1,184,200 of secured debt and $394,725 of unsecured debt in order to be eligible for a Chapter 13 bankruptcy (as of April 2016).

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