If you are under financial stress and wondering how you can deal with mounting debt, bankruptcy may present a solution for you. Chapters 7 and 13 of the U.S. Bankruptcy Code detail two ways individuals may file for bankruptcy. Understanding how each of them work can help you figure out the right path for yourself.
In contrast to a Chapter 7 filing, which entails selling off non-exempt assets and paying part of the debt from the proceeds, Chapter 13 has a structured repayment plan as its cornerstone. Over a period of three to five years, a Chapter 13 debtor makes monthly payments to cover all or part of qualifying debts.
Chapter 13 requirements
To qualify for Chapter 13 bankruptcy, you will need to show a regular income that leaves you with disposable funds after you pay for necessities. You are required to have income sufficient to pay off the entire debt in three to five years. Chapter 13 discharges remaining eligible debt at the end of the repayment period, so long as you comply with the payment schedule. However, bankruptcy courts generally want your repayment plan to provide your creditors with at least the same total amount they would get if you opted for a Chapter 7 instead.
What a Chapter 13 can do for you
The major advantage of a Chapter 13 is getting to keep property that may not fall under a Chapter 7 exemption. Another benefit is that you typically get to keep property you owe money on and make up the payments, rather than losing the asset.
Filing a Chapter 13 bankruptcy can help with overdue mortgages and car payments. You may also be able to make up taxes, alimony, child support and some student loans. Unlike other debts, however, you typically will need to pay these in full; they will not be discharged at the end of the bankruptcy period. However, you can still benefit by avoiding interest and penalties that may otherwise accrue as you fall behind. An experienced bankruptcy attorney can review your case and advise you as to whether Chapter 13 or another option would offer the best solution in your situation.