WHAT IS A CHAPTER 13 BANKRUPTCY?
A chapter 13 bankruptcy is nothing more than a court-sanctioned debt consolidation plan that creditors are forced to accept. The debtor lists their debts and assets and income. Assuming a regular full-time job, then the debtor proposes to pay a certain amount of dollars every month to a trustee who then pays the creditors.
The creditors only collect what they are paid under the plan.
In a Chapter 13, there are restrictions as to income, length of repayment time, amount and type of debtor.
The concept was originally implemented in the 1950s when most people worked a steady 40 hours a week set pay job such as a factory union job. Then it was fairly easy to re-budget and make payments. The cost of the plan was borne by the creditors.
There are now several large drawbacks to a chapter 13 bankruptcy
The process takes a long time AND you have to start paying into the trustee immediately. Any increase in pay or extra pay during the period of the plan belongs to the trustee. Your tax refunds belong to the trustee.
Permission for any large expense such as switching cars or buying a home or even selling a home requires court pleadings and approval of the Court.
A chapter 13 bankruptcy does have several beneficial assets.
First, there is not an 8-year requirement between Bankruptcy proceedings. Second, mortgage delinquency can be classified as a separate debt, then the original mortgage is reinstated and the delinquency paid through the Chapter 13 plan. Any IRS or State tax delinquency can be handled in the same manner. Back child support can be handled the same so that the right to license a car or have a driver’s license is not affected.
For most debtors, a chapter 7 proceeding is much more desirable. It is over and done with quickly. The attorney fees are far less. You keep all the assets you would in a chapter 13 bankruptcy.
Today, very few attorneys will file chapter 13 for the debtors. I have advised clients not to file anything in Bankruptcy Court if they cannot qualify for a chapter 7.