Chapter 13 Bankruptcy

Unlike chapter 7 (where the debtors lose their assets, wipe out their debts and immediately start over), chapter 13 allows debtors to:

• keep their assets in exchange for adopting a
• Court-approved "plan" to repay all or a portion of their debts out of their future income for the next 3-5 years.
• The debtor (through his/her attorney) determines the amount of "disposable income" (the amount of money the debtor has left over after paying his current year's taxes and "necessary living expenses"). This amount is paid to the court-appointed trustee each month for distribution to the creditors.
• Certain "priority" creditors must be paid in full over the life of the plan. Generally, any monies paid in over the life of the plan above this amount are distributed to the "non-priority" creditors on a pro rata basis.
• In exchange for successfully completing the plan, the debtor receives a discharge from all “non-priority” debts to the extent not paid during the plan.

Why can this be better than filing a chapter 7?
Chapter 13 can be useful in several situations:

• A homeowner facing foreclosure can keep his home by (i) begin paying the mortgage payments again, and (ii) repaying the amount the debtor is behind on the mortgage (called the "arrearage") over the life of the plan.
• If the debtor has a civil tax penalty or non-dischargeable income tax debts (which cannot be discharged in a chapter 7), these can be paid back ratably over the life of the plan usually without the further accrual of penalties or interest.
• Chapter 13 must be used instead of chapter 7 if: (i) the debtor makes more than a certain amount of money, and (ii) his debts are primarily "consumer" in nature (credit cards, medical bills, home mortgages), and (iii) the debtor's income is high enough that he can pay back at least a certain portion of his debts during a plan.

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