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What Is A Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a method for individuals who are wage earners and have regular income to reorganize their debts and pay a percentage distribution to creditors over time. The required Chapter 13 Plan payment will be determined based on the amount of the individual’s disposable income, which is calculated as a result of the means test and the debtor’s budget. Chapter 13 bankruptcy is utilized primarily for individuals who want to have excess equity above the exemptions, but are also being forced to pay some money to their creditors. If they want to keep excess equity, then they will have to pay that value to creditors. This is known as the “best interest of creditors” or the liquidation test. In other words, the individual must pay their creditors at least as much as the creditors would receive in a theoretical liquidation.

Chapter 13 bankruptcy is very often used for individuals who have multiple payments in mortgage arrears and want to structure payment of those over the life of a three or five-year plan. In essence, Chapter 13 bankruptcy is a method of personal financial reorganization. It is only available for individuals or sole proprietorships. Businesses that are corporations and limited liability companies are not eligible…Read More

What Will I Be Able To Keep In A Chapter 13 Bankruptcy?

In a Chapter 13 bankruptcy, there are a number of exemptions that will allow the debtor to keep property, provided the plan provides for a distribution to creditors representing the value of assets over the exemptions. For instance, if parties have $50,000 in real estate equity above the exemption limit, then they would be able to retain that equity so long as they pay at least $50,000 to their creditors over the course of a five-year plan. This concept in a Chapter 13 confirmation requirement known as the liquidation test. A debtor must pay their creditors as least as much as they would receive in a theoretical liquidation…Read More

Debt Adjustment

A Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the Chapter 13 plan on time. Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

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Michael McLaughlin, Esq.

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