Chapter 13 Bankruptcy

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy allows you to set up a payment plan for your creditors lasting from 3 to 5 years. It is very different from the “non-bankruptcy” debt settlement or debt consolidation services you will often see advertised as an “alternative” to filing for bankruptcy:

  1. In most cases in Chapter 13 you don’t have to pay back all of your unsecured debt. Typically, you pay back only a part of the debt, and the rest is discharged.
  2. In Chapter 13 you don’t have to get your creditors’ permission– if you meet the requirements of the bankruptcy law, the court can order your creditors to accept your plan.

Correctly done, Chapter 13 bankruptcy can allow individuals and small businesses with regular income to stop foreclosures and repossessions, catch up on house payments, rework car loans and eliminate unsecured debt. As in Chapter 7, the automatic stay also stops creditor harassment, lawsuits, garnishments, bank levies, judgments and judgment liens.

Incorrectly done, a Chapter 13 bankruptcy can be an expensive waste of time and money that leaves you in even worse shape than when you began the case. It is critical to understand from the beginning whether and how you can actually succeed in a Chapter 13 case.


Matching Your Payment to Your Ability to Pay

In Chapter 13 bankruptcy, the court lets you reduce and rework your debt into a payment plan based upon your ability to pay. The payment should be determined by what you have left over after meeting your household and other necessary living expenses, such as groceries, utilities, phone, gas, medical and prescription, and similar expenses. This is the core concept of Chapter 13 debt relief– you should not have to pay more than you can afford to pay.


How Does Chapter 13 Affect My Home and Car Loans?

Chapter 13 provides a tool for keeping and reworking the payments on your home loan, car loans, and other secured debt where you may have fallen behind on payments:

  • It is important to understand that you cannot lower your home mortgage payment. But you may take up to five years to catch up on any payments you have missed by paying an extra amount each month along with your regular payment.
  • You can reduce the payment and even lower the interest rate on many car loans and other secured loans, such as furniture, appliances, and jewelry.


What About My Unsecured Debt in Chapter 13?

You do not have to pay back all of your unsecured debt. You pay back only what you can afford to pay back, almost always without interest. The rest of the unpaid debt is discharged at the end of the case. You may pay back only a small percentage of your overall unsecured debt. This is the powerful difference between Chapter 13 bankruptcy and so-called “non-bankruptcy” debt negotiation services.


Limitations and Pitfalls of Chapter 13

Chapter 13 sounds great. But understand that if you don’t make your payments, your case will be dismissed.  You will likely still be behind on house and car payments, and your creditors can come after you.

In my experience, the payment actually required by the Chapter 13 system is too often unrealistic and unaffordable. For that reason I have reduced my use of Chapter 13 as a debt relief tool. It is certainly an essential resource when you are immediately facing a foreclosure sale of your home or repossession of your car. But otherwise, I find it is often a better solution for my clients to focus their resources on bringing and keeping their house and car payments current and then seeking Chapter 7 bankruptcy relief on their other unsecured debt.

The key to a successful Chapter 13 case is careful analysis of your actual ability to pay. There is no substitute for clear thinking and attention to detail. I will not propose or recommend a Chapter 13 plan unless you and I are both certain that it is one that you can truly afford and one that you can expect to successfully complete.
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