Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization case filed by individuals who have a valuable asset, such as a home, that is not completely covered by exemptions and that they wish to keep. The most common reason for debtors filing Chapter 13 is to stop foreclosure proceedings and save their home. Sometimes, Chapter 13 can be used to “strip off” or discharge second and third mortgage liens where there is no equity in excess of the value of the first mortgage, or to salvage a car that has been repossessed by the bank or finance company.
Have questions and need some quick answers about Chapter 13? Read our Chapter 13 FAQs.
In Chapter 13 bankruptcy, a debtor proposes a plan to repay creditors over a three to five year period during which the debtor can make up overdue payments on any assets and pay into the plan the equivalent value of any assets not covered by exemptions. Since the debtors plan will require regular monthly or biweekly payments, Chapter 13 is usually only appropriate for an individual debtor who has a regular source of income.
At a confirmation hearing, the court either approves or disapproves the plan, depending on whether the plan meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 bankruptcy, since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7 bankruptcy, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor action while the plan is in effect.