Often called a Debt Reorganization, the chapter 13 bankruptcy is useful for individuals who can afford to pay a portion of their debt.
A Chapter 13 bankruptcy is used when one of three things occurs: (1) you cannot qualify for a Chapter 7 bankruptcy and you still need to file bankruptcy to avoid issues such as garnishment. (2) You are not current on your house or car payments, but you wish to catch up with these payments so you may keep your property. (3) You may utilize the Chapter 13 bankruptcy process because it is advantageous (i.e. To remove a second mortgage, pay a large amount of tax debt, or get rid of a debt that you are unable to eliminate in a Chapter 7 bankruptcy.
While in a Chapter 13 bankruptcy, the Debtor is required to make a monthly payment to a chapter 13 trustee. This payment is used to pay car and house payments along with any arrears in taxes, and domestic support obligations. A portion (between 0 and 100%) of this payment is allocated to the unsecured creditors (ie credit cards, personal loans, medical bills, etc). A typical Chapter 13 case lasts between 36 to 60 months. Once the final payment is made, the Debtor receives a discharge of any unsecured debts that are not paid (provided it can be discharged).
Most people ask why they should file for chapter 13 bankruptcy as opposed to entering a debt settlement program or a debt repayment. These are a few of the many reasons why a chapter 13 is beneficial.
Interest: During a chapter 13 bankruptcy a person is not required to pay interest on the debts that they are paying, however, interest is still paid on a consolidation.
Amount paid: During a chapter 13 bankruptcy all creditors must be listed and they are all paid a portion of the debt which can range from 0-100%. During a consolidation only the creditors that agreed to be part of the plan are paid, and they are paid in full. This can be a problem because some creditors may not agree to the plan. In bankruptcy this is not permitted. Creditors must abide by the plan or not get paid.
Taxes: If a debt is not fully paid back, the creditor is required to report the unpaid amount to the IRS, and the IRS treats the unpaid portion of the debt that was not paid as income. This can affect a person’s income tax refund or mean that a person owes the IRS money. This rule is not applicable if a person files for bankruptcy relief.
A more detailed analysis on your Chapter 13 option will be done when you contact our office and schedule a free initial consultation with Christopher S. Owen.