Most of the time, when you think of bankruptcy, you think about a Chapter 7 liquidation, where you wipe out bills and start over. However, Chapter 7 is but one of several types of bankruptcy filings available to you.
In fact, Chapter 13 bankruptcy is the most common form of bankruptcy. Unlike a Chapter 7, where most creditors do not get paid, Chapter 13 functions as a payment plan. Chapter 13 is designed to help you save property like your house or your car, if you have fallen behind on your payments and are facing foreclosure or repossession.
You also pay back other debts in a Chapter 13, including credit card debts, medical bills and loans. Sometimes we can create a payment plan in which you pay back these other debts at less than 100%. By law you are required to include all of your debts in your Chapter 13 plan. In addition, you have to pay your Chapter 13 plan through a payroll deduction filed with your employer.
When we file Chapter 13, we not only file schedules that disclose your assets and liabilities, income and expenses, but we also file a proposed plan of repayment. Chapter 13 plans typically last 60 months, which means that if we are successful in getting your Chapter 13 plan confirmed, you will be in bankruptcy for the next 5 years.
When Does Chapter 13 Make Sense for You?
- if your household income exceeds the median income figure for your family size and you cannot pass the means test, you have no choice but to file Chapter 13
- if you are behind on your mortgage payments and you want to save your home, you can file Chapter 13 and put the missed mortgage payments (your mortgage arrearage) into your plan
- if you are behind on a vehicle loan or other secured debt loans and you want to keep the collateral, you can use Chapter 13 to, in essence, refinance your loans
- if your monthly payments on your various installment accounts leaves you underwater, Chapter 13 may allow you to restructure the terms of your accounts so you can pay back some or all of your debt
- if you owe
$1,395,000 or less of secured debt and $465,275 or less of unsecured debt. If your debt exceeds these jurisdictional debt limits, you cannot file Chapter 13, your options are Chapter 7 or Chapter 11. Click here for more about Chapter 13 debt limits.$2,750,000 of total debt (the debt limits of Chapter 13 were modified on June 21, 2022 for two years and will revert back to the prior numbers if Congress does not act) - while a corporation or LLC cannot file Chapter 13 (only “natural persons” can choose the Chapter 13 option, many small businesses that are not incorporated can take advantage of the automatic stay to restructure debt payments over a 5 year period of time.
if you cannot otherwise qualify for Chapter 7, Chapter 13 may be your remaining option. If your debt exceeds the debt limits of Chapter 13, you can look at filing an individual Chapter 11 case, but that is an expensive and very complicated option.
Why Might Chapter 13 be a Bad Idea?
Statistically, only three out of every ten Chapter 13 cases actually make it through to discharge. As such a Chapter 13 can buy you time and avoid an emergency situation but in many cases you are only delaying foreclosure, repossession or wage garnishment, or, more likely, a conversion to Chapter 7.