Chapter 13: Lose Your Debt, Keep Your House

More than 1.4 million Americans filed for bankruptcy in 2009, as the subprime housing crisis, high unemployment and growing healthcare costs drove many families and individuals into insolvency.

While Chapter 7 bankruptcies, bankruptcies that result in a straight discharge of debts after the liquidation and sale of non-exempt assets, remain the majority of bankruptcy cases, a growing number of Chapter 13 bankruptcies are being filed, thanks to a law tightening requirements for obtaining a Chapter 7 bankruptcy.More than 400,000 individuals filed for Chapter 13 bankruptcy in 2009, up by about 12 percent from the previous year.

When considering filing for bankruptcy, individuals should understand the different types of bankruptcy and how each type will impact their finances so they’ll be able to choose the best bankruptcy option available, or find another way to discharge their debts.

What is Chapter 13 bankruptcy?

Chapter 13 is commonly known as a reorganization bankruptcy, a bankruptcy that allows debtors to reorganize their debts and pay them down over a period of three to five years. In the past, Chapter 13 was most often filed by folks with substantial assets that were non-exempt from liquidation under a Chapter 7 bankruptcy. To avoid having these assets sold off to repay creditors, these folks filed a Chapter 13 bankruptcy instead, which gave them more leeway to repay their debts, some of which were reduced by the courts.

The bankruptcy courts now impose a means test on individuals seeking to file a Chapter 7 bankruptcy. If the individual’s income is more than the state median, the court may decide that the individual filing for bankruptcy should do so under Chapter 13 instead. In general, if your disposable income, that is income after bills and basic living expenses, is more than $185.50 per month, you’ll be forced to use Chapter 13 instead of Chapter 7.

Anyone is eligible to file Chapter 13 bankruptcy so long as their unsecured debts are less than $336,900 and their secured debts are less than $1,010,650. Prior to filing for a bankruptcy, the court will require you to see a credit counselor at your own expense. During this visit, you can find out if Chapter 13 is right for you.

How does it work

In a chapter 13 bankruptcy, you’ll need to submit information regarding your income, assets and debts to a court-appointed trustee during a proceeding called the first meeting of creditors. This occurs after your attorney has filed the petition for Chapter 13 protection.

The court will determine how much money you’ll have to repay over a three to five year period, depending on your income and how much you owe. Once this is determined, you’ll be put on a repayment plan. Chances are that you won’t have to pay all of the debt you owe, depending on the size of your debt and your income, the court will likely prioritize your debts, requiring you to pay in full certain debts and only partially pay others over your repayment period.

During your period of repayment, you’ll make payments on the debt, or you can have deductions made from your paycheck. If you’re unable to make payments because you lose your job or under certain other circumstances, the court can alter your repayment plan, or, in hardship cases, discharge it altogether.

Benefits of Chapter 13

There are a few benefits to filing a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy. When you file a Chapter 13 bankruptcy, you have the opportunity to save your home from foreclosure because the mortgage debt you’re behind on can be made part of your debt repayment plan. Also, a Chapter 13 plan helps protect the credit of co-signers on any loans you may have taken out.

The downside

Just because you repay your debts under a Chapter 13 bankruptcy, you don’t get off the hook with regard to the negative impact of a bankruptcy on your credit report. Your bankruptcy will sit on your credit report for 10 years, and make it tougher for you to get loans or credit, and will likely run up your interest rates if you do. While the bankruptcy stays on your credit report for 10 years, most of its negative impact will abate after five.

With a Chapter 13 bankruptcy, and a commitment to repayment on your part, you can help rebuild your financial life. While it does not provide the quick discharge of debt that a Chapter 7 bankruptcy does, a Chapter 13 bankruptcy can let you keep your home, zap high credit card interest rates and get on with your life after discharging your debt.

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