Chapter 13 Bankruptcy

  Personal bankruptcy filings, whether they are Chapter 7 or Chapter 13, are a legal means for people to solve their financial problems.  Both are a little more complicated under current law than they were in the past.  In a Chapter 7 bankruptcy filing, or a straight bankruptcy filing, assets are liquidated and the proceeds are used to payoff unsecured debts.  Under a Chapter 13 bankruptcy filing, debts are not discharged  they are paid off.  People do not have as much leeway as they used to in selecting which filing they want.  Depending on income, liquidation may not be a viable remedy.

Filing Chapter 13 Bankruptcy

     The first step for anyone considering a chapter 13 bankruptcy filing is to see a U.S. Trustee's office-approved credit counseling agency.  The purpose of this pre-filing counseling is to see if a bankruptcy filing is necessary or can the money problems be solved with financial management and a restructured payment plan.   Any financial plan that the credit counseling agency comes up with has to be presented in court, even though the debtor is not obligated to accept the plan.  A means test is now employed to determine eligibility for either a Chapter 7 or a Chapter 13 bankruptcy filing.

      In a Chapter 13 filing, the debtor is required to work out a debt repayment schedule with the creditors.  These debts are paid out of the debtor's disposable income which is determined based on a six-month average income less allowable expenses.  Allowable expenses are based on IRS standards, not the actual expenses of the debtor.  This can result in lower than actual expenses being deducted from an average level of income which will probably not accurately reflect the filers true financial position.  These are the income and expense definitions that the filer has to abide by during the years of repayment.  These definitions may adversely affect the success of the reorganization plan.

Chapter 13 Bankruptcy Advantages

     The advantage of filing under Chapter 13 bankruptcy is that it allows the debtors to keep most of their property, like their home and other assets, while they are paying off their debts.  Creditors realize the advantage of working with them on a longer term payment schedule, usually three to five years, because the creditor stands a better chance of recovering more of the unsecured debt than they would in a straight bankruptcy filing.  The debtor is also free of dunning calls from collection agencies and wage garnishment during this period.

      A Chapter 13 filing still leaves a mark on the debtor's credit record for a period of seven years.  During this time, it may be harder to get a home mortgage, a car loan or other forms of credit after bankruptcy, but not impossible.  There are financial entities that exist solely to service this market.  Another disadvantage of Chapter 13 bankruptcy filings, are higher legal fees, since the process is longer-term and more involved.  Emerging from reorganization may find some debts still existing since they weren't covered by the filing. You should always seek professional advice prior to filing Chapter 13 bankruptcy.