Chapter 13 Bankruptcy: Repaying Personal Debts

This post was contributed by our Financial Literacy Movement partner Total Attorneys.

The second most common form of personal bankruptcy, Chapter 13, is designed as a debt repayment plan for those people who have enough income to pay down their debts over time.

Filing chapter 13 bankruptcy is often seen as an alternative for those who make too much money to qualify for Chapter 7 bankruptcy, but it is often used by homeowners facing foreclosure to help them stay in their homes.

When a person files for Chapter 13 bankruptcy, the court’s automatic stay puts an end to all collection efforts, like foreclosure, repossession and debt lawsuits. The petitioner then enters into a debt repayment plan that lasts between three and five years.

Chapter 13 filers are not typically expected to pay all of their debts through the bankruptcy court. Debts are rated in priority: Taxes, child-support and secured debts are paid in full through the plan, while unsecured debts like credit cards are only paid based on what the petitioner can afford, usually only pennies on the dollar. Any unsecured debt remaining at the end of the payment period is forgiven by the court.

One benefit for those who have struggled with credit in the past: Chapter 13 protects co-signers on loans, both during the process and after debts are repaid or discharged.

Chapter 13 filers also typically have valuable property, such as a home, car or other physical assets, that could be at risk from aggressive creditors or subject to liquidation in a Chapter 7 bankruptcy filing.

Who Can File Chapter 13 Bankruptcy?

Chapter 13 filers come from all walks of life, but bankruptcy laws create a few requirements for those seeking this form of debt relief. These include:

• A predictable source of income: Chapter 13 filers must commit to up to five years of monthly payments to the bankruptcy court.
• Enough income to cover living expenses: The court allows bankruptcy filers to cover their necessary living costs before handing any money over to creditors. If you’re unable to afford housing, utilities, food and other basics, bankruptcy may not be the right choice for you.
• Debts below the limits set by federal law: Chapter 13 filers can only include up to a certain amount in their repayment plans. The federal limits on Chapter 13 debt are high enough that most people considering bankruptcy don’t need to be concerned, but a bankruptcy attorney can help you determine if your debts fall outside these limits.

In addition to these guidelines for Chapter 13 filers, the bankruptcy process also requires certain steps along the way. These include:

• Pre-filing Credit Counseling course. All consumers looking to file for bankruptcy protection must complete a credit counseling course within 90 days prior to filing. These courses can be taken in person, online, or over the phone. This course is designed to inform the consumer of his or her debt-relief options, including bankruptcy.
• Pre-discharge Debtor Education course. All bankruptcy filers must take a debtor education course before receiving their debt discharge from the court. This course is designed to provide important credit and debt tips for life after bankruptcy. Like the Credit Counseling course, the Debtor Education course can be taken in person, online or by phone.

Total Attorneys helps connect consumers with a nationwide network of sponsoring bankruptcy attorneys that can help individuals decide if bankruptcy is the right option to potentially eliminate debt or stop foreclosure on your home.

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