Chapter 13 just happens to be the 13th chapter of the Bankruptcy Code. It is not because it is unlucky, unless you’re forced into it because you make too much money to file a Chapter 7. Even then, it is a lot better than not having bankruptcy protection, and under many circumstances it can even be preferred to Chapter 7.
Chapter 13 is the only reorganization chapter available to most individuals. Chapter 11 is generally too expensive and cumbersome for individuals, and the creditors have to vote on the plan. However, in a Chapter 13 the creditors don’t get a vote and the Chapter 13 is forced on them unless they have a credible objection.
Unlike a Chapter 7 case, the Chapter 13 does not bring your assets into potential liquidation so long as you pay more than you would in a Chapter 7, even if it is only by one dollar more. What’s in play is your income and your ability to repay your debts over a term that is usually three to five years long. Payments are ordinarily monthly.
Your monthly payment is determined by what you can afford to repay after paying your reasonable and necessary expenses. For under the median income debtors this is a simple budget you put together based upon your income versus the allowable expenses. For over the median income families the budget is a complex calculation using the IRS Offer in Compromise standards currently in effect when you file your case, combined with your actual expenses for secured debt you have such as your mortgage and car.
Once your case is “confirmed,” meaning the judge has signed off on it after examination and consultation with the Chapter 13 Trustee, then you just make the monthly payment and then at the end of the plan term you will receive a discharge just like in a Chapter 7.
- You can catch up on mortgage payments you’ve fallen behind on before the case. So it helps you keep your house.
- You can strip off a completely unsecured second and/or third mortgage. Many times your house has become worth less than the loan amount owed on the 1st mortgage. In that case, the 2nd mortgage has no equity and is just like a credit card and can be treated as such, and upon completion of your plan the mortgage cannot be enforced. This means much more practical debt relief.
- You can repay nondischargeable taxes without incurring any further interest or penalties.
- Your amount out of pocket for attorney fees are often less.
- Some debts that are not dischargeable in Chapter 7 are dischargeable in Chapter 13.
- Student loans are repaid in Chapter 13 along with the credit cards and other unsecured debts, making the net effect of having to make payments much more tolerable for professionals with large student loan debt.
- The case lasts longer.
- Your credit score improves much slower.
- It is harder administratively than Chapter 7.
- You are on a budget for the term of the plan.
- The net costs are probably higher, unless you’ve lien stripped a mortgage.
- The discharge is riskier because it depends on your performance over an extended period of time.
You can now save for your retirement during a Chapter 13 plan under the new laws, so you need not get behind on your retirement savings while your managing your debt. In a Chapter 13, you are reallocating your cash flow in a way that leaves you better off financially at the end, and is also fair to your creditors.
