Bankruptcy is a process established under Federal Law that is designed to allow individuals, businesses and other entities to obtain a “Fresh Start” with their financial situation. Such a Fresh Start is very important in today’s economy, with debt continually increasing and income decreasing compared to the cost of living.
Chapter 13 is designed for individuals with a regular and stable source of income who are temporarily unable to pay their debts but who desire to use their best efforts and good faith to pay them in instalments over a period of time subject to the protections afforded by the Chapter 13 rules. You are only eligible for Chapter 13 if your debts do not exceed certain dollar amounts set forth in the Bankruptcy Code. Individuals, couples and those with a small business may file under chapter 13; Limited Liability Companies and Corporations may not.
Chapter 13 is also useful for people who have a mortgage that is in arrears since it allows them to pay back the past-due amounts over time under control of the Court. Chapter 13 may even allow you to “strip off” junior mortgages if the property is “under water” and to treat those mortgage creditors as if they were “unsecured”. Unsecured creditors get paid a percentage of what is owed them or sometimes nothing at all. Chapter 13 is also useful to rehabilitate a small business or to pay debts that might otherwise have to be paid, such as taxes, all while under the supervision and control of the Court. (See the article “What types of Creditors are there?” for more details about treatment of creditors in Bankruptcy).
Under Chapter 13 you must file a “Plan” with the Court that describes the amount of the monthly payment, the length of the payment period, what “class” creditors are in and how much each class of creditor gets paid. The Plan uses your future earnings for that payment. The Plan can also provide for the disposition and/or abandonment of certain collateral such as land and motor vehicles. You are protected from your creditors in most cases upon the filing of the Chapter 13 Petition and Plan but the Plan must be approved by the Court before it can take effect. An experienced attorney will see to it that you pay no more than you are legally required to pay in order to have a Plan confirmed by the Court.
The new bankruptcy laws require you to perform a “Means Test” to help determine your disposable income. A Means Test is a formula that provides a reporting and calculation of “current monthly income”. In chapter 13 cases, “current monthly income” is used to determine the disposable income that must be contributed to payment of unsecured creditors. (See the article “Means Test Basics” for more information).
Under Chapter 13, unlike Chapter 7, you may keep all of your property, both exempt and non-exempt, as long as you continue to make payments under the Plan. After completion of payments under the Plan, most or all of the remaining balances on your debts are discharged. Most debts that are not dischargeable in a Chapter 7 filing are now also not dischargeable in a Chapter 13 case. See the article “What Debts are Not Discharged?” for more information.