Chapter 13 Bankruptcy FAQ

1.  What is a chapter 13 bankruptcy case and how does it work?

fotolia_46419069A chapter 13 bankruptcy case is a  proceeding under federal law in which the debtor seeks relief under chapter 13  of the Bankruptcy Code. Chapter 13 is  the chapter of the Bankruptcy Code which allows a person to repay all or a  portion of his or her debts under the supervision and protection of the  bankruptcy court. The Bankruptcy Code is  the federal law that deals with bankruptcy.

A person who files a chapter 13 case is called a debtor. In a chapter 13 case, the debtor must submit to the court a plan for the repayment of all or a portion of his or her  debts. The plan must be approved by the  court to become effective. If the court  approves the debtor’s plan, most creditors will be prohibited from collecting their claims from the debtor. The debtor must make regular payments to a person called the chapter 13 trustee, who  collects the money paid by the debtor and disburses it to creditors in the  manner called for in the plan. Upon  completion of the payments called for in the plan, the debtor is released from  liability for the remainder of his or her dischargeable debts.

2.  How does a chapter 13 case differ from a chapter 7 case?

The basic difference between a chapter 7  case and a chapter 13 case is that in a chapter 7 case the debtor’s nonexempt  prop­erty (if any exists) is liquidated to pay as much as possible of the  debtor’s debts, while in chapter 13 cases a portion of the debtor’s future  income is used to pay as much of the debtor’s debts as is feasible under the  debtor’s circumstances. As a practical  matter, in a chapter 7 case the debtor loses all or most of his or her  nonexempt property and receives a chapter 7 discharge, which releases the  debtor from liability for most debts. In  a chapter 13 case, the debtor usually retains his or her nonexempt property,  but must pay off as much of his or her debts as the court deems feasible and  receives a chapter 13 discharge, which is slightly broader than a chapter 7  discharge and releases the debtor from liability for a few types of debts that are not dischargeable under chapter 7.

However, a chapter 13 case normally lasts much longer than a chapter 7 case and is usually more expensive for the debtor.

3.  When is a chapter 13 case preferable to a chapter 7 case?

Chapter 13 is usually preferable for a  person who – (1) wishes to repay all or most of his or her unsecured debts and  has the income with which to do so within a reasonable time, (2) has valuable nonexempt property or has valuable exempt property securing debts, either of  which would be lost in a chapter 7 case, (3) is not eligible under means  testing to maintain a chapter 7 case, (4) is not eligible for a chapter 7 discharge, (5) has one or more substantial debts that are dischargeable under chapter 13 but not under chapter 7, or (6) has sufficient assets with which to repay most of his or her debts, but needs temporary relief from credi­tors in order to do so.

4.  How does a chapter 13 case differ from  a private debt consolidation service?

In a chapter 13 case, the bankruptcy  court can provide relief to the debtor that a private debt consolidation  service cannot provide. For example, the  court has the authority to prohibit creditors from attaching or foreclosing on  the debtor’s property, to force unsecured creditors to accept a chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt  consolidation services have none of these powers.

5.  What is a chapter 13 discharge?

It is a court order releasing a debtor from all of his or her dischargeable debts and ordering creditors not to  collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13  discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan, and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments  called for in the plan due to circumstances for which the debtor should not be held accountable. A full chapter 13 discharge discharges a few more debts than a chapter 7 discharge, while a partial chapter 13 discharge is similar to a chapter 7 discharge.

“We are a debt relief agency.  We help people file for bankruptcy relief under the Bankruptcy Code.” See 11 U.S.C. 528(b)(2).

My thanks to Argyle Publishing.