Chapter 13 is a section of the Bankruptcy Code which allows individuals (not corporations or partnerships) who are in financial difficulty to pay their creditors over time, while under the protection of the Bankruptcy Court. As with a Chapter 7, at the moment of filing the bankruptcy petition, the Bankruptcy Court issues an order, preventing creditors from taking any action against you.

What is a Chapter 13 Bankruptcy? The general concept of a Chapter 13 is that the debtor makes monthly payments to a Chapter 13 trustee, who, in turn, pays creditors according to their status. It is somewhat like a debt consolidation or a program offered by a debt counseling service such as Consumer Credit Counseling Service (CCCS). However, there are significant differences between what is possible in a Chapter 13 and what CCCS can offer. CCCS and other nonprofit credit counseling services perform a good service, and I often recommend that this option be explored prior to filing bankruptcy. However, many of my clients who have attempted, without success, to follow a counseling service's plan report that the monthly payment amount was so high that they literally could not maintain a minimal standard of living. By contrast, even though in a Chapter 13 you are required to devote your disposable income to the plan, monthly payments still often are less than what is required in a counseling service's plan. Also, some clients tell me that, even though they are making payments diligently to the counseling service, the creditors keep harassing them. This harassment must stop in a Chapter 13. Finally, most unsecured creditors in a credit counseling plan do not stop charging interest. So, the time required to pay the debt may not be significantly shortened over the normal payment schedule. Typically, in a Chapter 13 all interest stops on unsecured debts. These differences are discussed more fully below.

Why Should I File Chapter 13? Whether you should file a Chapter 13 instead of filing under another chapter, such as Chapter 7, involves detailed analysis into your financial situation, and you should consult with an experienced attorney prior to making this decision. However, some factors suggesting that a Chapter 13 should be filed are the following:

Are you faced with a foreclosure or seizure of property? If your home mortgage company has filed a foreclosure action or other property, such as a vehicle, has been seized, you have little choice, if you want to save this property. You must file a Chapter 13 proceeding. You will be able to catch up on the past due amount ("cure the arrearage") over an extended period of time under the protection of the Bankruptcy Court, and you will not lose the property.

Do you have property that would be lost in a Chapter 7? As explained in the page concerning Chapter 7, one of the duties of the Chapter 7 trustee is to "liquidate" (sell, if necessary) property, and then distribute the proceeds to creditors. If you have property which would at risk in a Chapter 7, and you do not want to lose this property, then you will want to consider a Chapter 13. For example, if a Chapter 7 debtor has a vehicle that is paid for (and the vehicle is worth enough), the Chapter 7 trustee may well sell the vehicle. In a Chapter 13 framework, the vehicle is not lost.

Are your nondischargeable debts large in comparison with your dischargeable debts? If the bulk of your debt is nondischargeable debt such as student loans or most taxes, and you need protection from your creditors, a Chapter 7 proceeding will not be successful in the long run. Although the automatic stay will protect you from creditor harassment up until the time that the Chapter 7 discharge is granted (normally about 90-150 days from the date that the petition is filed), after the discharge a creditor with a nondischargeable debt is free to start up collection efforts again. The Chapter 7 discharge, then, although it will cover some debt, will leave most of the debt still owing. The answer? File a Chapter 13, if possible, to pay the debt while under the protection of the Bankruptcy Court.

Do you have debts that are nondischargeble in Chapter 7, but are dischargeable in Chapter 13? There are some debts that are not dischargeable in a Chapter 7 that are dischargeable in a Chapter 13. Some of these include the following:

• Debts incurred by fraud or false representations, embezzlement or larceny;
• Some income tax debts (generally, those that are over 3 years old from the date the returns were due, with the return filed more than 2 years ago, and that were assessed more than 240 days prior to the filing of the bankruptcy case);
• Debts incurred by willful and malicious injury to another person or their property.
  
  If, at the end of the Chapter 13 plan, you have not been able to pay all of this kind of debt, the rest will be discharged.

Who May File a Chapter 13? Only an individual with regular income who owes less than $269,250 in unsecured debt and $807,750 in secured debt. These debts must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount and not subject to any conditions or bona fide disputes.

How Does A Chapter 13 Work? As mentioned above, in a Chapter 13 plan, the debtor makes monthly payments to a trustee, who pays creditors. To make these monthly payments, you must have some source of income that is regular, such as employment income or rental income. You are required to pay all of your "disposable income."  to the Trustee for 36 months or more . The Trustee will pay some creditors in full. These include secured creditors and creditors who hold priority debts, such as most tax debt. Other, unsecured debt, will also be paid by the Trustee, but, depending on various factors , you may not be required to pay these debts in full. If, at the end of the plan, there remains a balance on the unsecured debt, the balance is discharged, and you will not owe it any more. (There are some exceptions, for example, student loans). You do not lose any property in a Chapter 13, unless your plan proposes surrender of this property.

What Debts Can Be Discharged In Chapter 13? First of all, any debt that you can discharge in a Chapter 7 will also be dischargeable in a Chapter 13. Further, there are other debts that, while they cannot be discharged in a Chapter 7, can be discharged in Chapter 13.

What About My Credit? What I have said about this topic in the Chapter 7 page applies here, as well. Let me add, however, that it is possible that a completed Chapter 13, especially if creditors were paid at 100%, will be more favorably regarded by prospective creditors. After all, a Chapter 13 is a debt repayment plan, not outright debt elimination. This is by no means clear, however, and there are many factors to consider and discuss with your attorney.

Although this firm does not handle Chapter 13 bankruptcy filings, we do have attorneys that we can refer you to for help.

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