What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, as recently redefined by the 2005 Bankruptcy Reform Bill passed by Congress, allows indebted individuals with durable income streams to retain some of their personal assets during liquidation. Chapter 13 bankruptcy is similar to Chapter 7 bankruptcy, in that creditors are paid through a trustee appointed to maintain a debtor's bankruptcy estate.

That said, Chapter 13 bankruptcy filers are empowered to keep all of their personal property and assets (although exceptions and exemptions do apply -- see your state's laws for details on the specific protections afforded by Chapter 13 bankruptcy in your area.) More about Bankruptcy Law.

One of the stipulations of Chapter 13 bankruptcy is that creditors are entitled to garnish as much as they would normally get under a redistribution in a Chapter 7. The rules for Chapter 13 bankruptcy have gotten much more stringent since the 2005 Reform Law, and individuals must have after tax assets below a certain median line in order to qualify for this kind of redistribution.

Chapter 13 bankruptcy can sometimes be an integral part of what's known as strategic bankruptcy -- in other words, the filing of a personal reorganization in order to negotiate a tricky or even untenable financial situation.

The question of what constitutes “disposable income” under Chapter 13 bankruptcy statutes is in some senses an open one. Although the federal government has laid down numerous rules for how to execute bankruptcy transactions -- most notably in the Title 11 code (as empowered by Article 1 Section 8 of the Constitution), any situations not expressly delimited by the federal code will end up under the province of state authority.

Chapter 13 bankruptcy isn't the only kind of reorganizational scheme that an individual can enact. Obviously, the Chapter 7 liquidation plan is another choice. If an individual is part of a corporation, he may be able to settle some creditor debts by filing Chapter 11 bankruptcy. That said, the intermingling of personal and business assets can touch off legal activity, so check with your attorney and your accountant to determine the viability of various “non-Chapter 7” bankruptcy filings.