Chapter 13 Bankruptcy: An Overview 

A Chapter 13 bankruptcy requires the repayment of debts through a court-ordered payment plan ranging from three to five years.  Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy typically allows the debtor to retain all of his/her property even if it exceeds their state’s exemption amount in exchange for the repayment of their debts. 

Following the introduction of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, more consumers are being forced to file for Chapter 13 bankruptcy.  In order to qualify, an individual must have a regular source of income and enough disposable income to contribute to the repayment of debts on a monthly basis.  A bankruptcy attorney can help consumers to create a realistic budget that will be submitted for approval to the court.   

Depending on the individual situation, a Chapter 13 bankruptcy may require the repayment of all of a portion of the debts owed.  In some cases, interest rates may be reduced or eliminated altogether.  Once a budget is submitted, it will be up to the bankruptcy court as to whether or not to approve the plan.  If any changes are needed, the court will adjust the plan accordingly before it is approved. 

A Chapter 13 bankruptcy begins with a full disclosure of all debts, income and both real and personal property on a bankruptcy petition to be filed with the court.  In addition, a budget proposal must be submitted, which includes a monthly payment amount to be made directly to the court-appointed trustee for disbursal to creditors.  The debtor(s) will then be given a notice to attend a 341 meeting, also known as a ‘Meeting of Creditors,’ which will involve the court-appointed trustee asking the debtor a series of questions regarding their petition.  This interview is recorded and typically takes place at a courthouse.  In addition to the 341 meeting, Chapter 13 petitioners will also be required to appear before the court in order to confirm their budget.  Once approved, monthly payments to the trustee will begin immediately. 

During the course of a Chapter 13 bankruptcy repayment plan, debtors are prohibited from applying for or accepting any new debt without first obtaining the court’s approval.  This includes an auto loan, mortgage and even credit cards.  If a debtor were to ignore this rule, the consequences could include a dismissal of the bankruptcy case and ceased protection under the current bankruptcy law.  If this should occur, creditors would then be free to pursue collection of the debts as though the bankruptcy never occurred. 

At the conclusion of a Chapter 13 bankruptcy and after all debts have been paid according to the repayment plan, the debtor will receive a discharge.  Following that, the case will be closed.  A bankruptcy will be reflected in an individual’s credit report for up to 10 years, but will become less of a concern to future lenders with each year that passes following the conclusion of the case. 

The information contained in this article is designed to be used for reference purposes only.  It should not be use as, in place of or in conjunction with professional legal or financial advice.  For additional information relating to the filing of bankruptcy, consult a local attorney who specializes in bankruptcy law.