Consumer – Chapter 13

Have you ever seen those late night commercials from companies who claim they can fix your credit and default problems — you pay them one payment each month and then they dole it out to your creditors (who they negotiate with to lower balances or interest): At the end of the period you are debt-free?

That is basically what a Chapter 13 filing does, only its managed by the Courts, so it is not a scam and all your creditors have to participate (not that all such companies are scams — in fact, I had a friend who was helped by one — but be aware that many of them are).

Chapter 13 is called a “wage earner plan”. For three to five years, you make monthly payments to a Court-assigned Trustee, who then pays your creditors a portion of what you owe. How much gets repaid depends or your individual finances and situation — sometimes it is as low as 5 cents on the dollar , sometimes it is 50 cents on the dollar. At the end of the plan, whatever wasn’t paid (of your dischargeable debts) is wiped away (some debts, like child support payments and school loans, are not dischargeable).

Obviously the speed and ease of a Chapter 7, which wipes away ALL of your dischargeable debts, is preferable, but it may not be an option for you for two reasons.

  • First, you may simply not meet the requirements because you make too much money. Since the 2005 changes to the bankruptcy law there are now limits on who may file for Chapter 7.
  • Second, you may be facing foreclosure.

While Chapter 7 cases technically stop foreclosures, it is only very temporary: when the Chapter 7 case concludes four to six month later, the foreclosure continues, because mortgages are not discharged (in some situations second mortgages/Home Equity lines of credit can be reduced or eliminated). In fact, in Chapter 7’s many banks will, sometimes as soon as you file, ask the Court to allow them to continue foreclosing despite the bankruptcy, and those requests are usually granted.

Chapter 13, however, can be used by Debtors to hold off banks for up to five years. Of course, there is a “catch”, if you will: to get the relief, you must submit and stick to a repayment plan whereby you pay back the arrears (missed payments and taxes) that you owe the bank. Certain other debts, such as taxes, also need to be repaid in full.

What about your credit cards and other unsecured debts? You will be required to contribute your disposable income (money you earn above your reasonable expenses) to provide for a partial payback of your other debts.

How much must you pay? It completely depends on your individual facts and circumstances. Some people end up repaying all their debts, others only pay pennies on the dollar. Regardless, when you complete the process you get a discharge of all remaining dischargeable debt (certain debts, like child support, are never dischargeable).