Chapter 13 Bankruptcy Laws

Understanding Chapter 13 bankruptcy laws will help a debtor decide if a repayment plan best fits his personal financial situation. It's clear that Chapter 13 is not the right choice for every individual debtor. In fact, less than one-third of all individual debtors choose Chapter 13 over a Chapter 7 liquidation bankruptcy. But there are elements of Chapter 13 bankruptcy laws that can be desirable for debtors in certain situations.

• Repayment plan. One of the key differences under Chapter 13 bankruptcy laws is the requirement that debtors propose a repayment plan to give disposal income to creditors. However, that repayment plan is important to some debtors, particularly those who have fallen behind on mortgage or vehicle payments. Chapter 13 debtors can retain property where they have fallen behind on payments by including the back-due amounts in the payment plan. That option is not available under Chapter 7, where any property that is not exempt is seized by the bankruptcy trustee and divided among creditors.
• Help for co-debtors. Chapter 13 bankruptcy laws also include a provision that is important for co-debtors. As long as the debt was not for business purposes, and it can be completely paid off in the repayment plan, a co-debtor is safe from collection actions. In Chapter 7, unsecured debts are liquidated only between the debtor and the creditor. The co-debtor would still be liable for any debts in a Chapter 7 scenario.
• Easier payment options. It isn't unusual for debtors to struggle to pay even the filing fee for bankruptcy, much less attorneys fees. Under Chapter 13 bankruptcy laws, a debtor can put both the $274 filing fee and attorneys fees into the repayment plan, softening the blow of both by taking as long as 60 months to handle each of those obligations. In Chapter 7, the filing fee and attorneys fees have to be paid immediately.

Other Aspects of Chapter 13 Bankruptcy Laws to Consider

Most debtors do not complete Chapter 13 repayment plans, in part because financial conditions can change drastically in weeks or months, much less over a 5-year period. Debtors who want to avoid going to bankruptcy may not be happy with Chapter 13. At least compared to Chapter 13, there is the potential for lots of bankruptcy hearings. Any changes in the payment plan - which could be triggered by a job change, issue at work or other even a natural disaster - requires bankruptcy court approval. Both creditors and the bankruptcy trustee have the right to object to proposed Chapter 13 payment plans, which again would necessitate a hearing. And at the conclusion of the payment plan, a hearing to consider a dismissal in the case is held.