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Chapter 13 Bankruptcy

While Chapter 7 is the quicker way for a debtor to get to Discharge, it can be more painful given some assets can be liquidated in the process. Now, Chapter 13 does take much longer to get to Discharge but it can be a friendlier place for a debtor to be.  Chapter 13 is often referred to as a “wage earner reorganization.” You have to be a person with regular income to be eligible to file for Chapter 13. There are lots of different types of income that qualify as regular income (obviously wages but also pensions, social security, disability, contributions from others, etc).  A huge benefit to Chapter 13 is that the debtor is allowed to keep and use all property and they get to resolve their debt and protect non-exempt assets out of future income.  Basically, Chapter 13 is a repayment plan of 3-5 years. A huge misunderstanding is that you have to pay all your debts through Chapter 13. That’s just not true!  Now, there are Chapter 13 cases where the debtor pays 100% of all timely filed, allowed claims… but those are the exceptions.    Most Chapter 13 cases have a very small repayment to unsecured creditors.  Chapter 13 can offer a lot of options that can provide relief to the debtor. Many of these options are not available in Chapter 7 so Chapter 13 is often a much better choice for a debtor, but it does take a long time to complete and that is the major drawback.

Why file a Chapter 13 instead of a Chapter 7? A debtor might not be eligible for Chapter 7 based on a prior Chapter 7 in the last 8 years and income above certain levels. Or, it might be better for your situation: Chapter 13 allows you to: Stop foreclosure and cure home arrears; Pay of priority taxes through the plan; Cram down on vehicle (lower car payment and interest rate); Protect non-exempt assets; Strip off a 2nd mortgage; Extended protection from student loans and other reasons. There are a lot of good reasons to file Chapter 13!

There are limitations on who can file for Chapter 13: Debt limits are approx 400k in unsecured debts and 1.2M in secured debts. You also can’t get a discharge in a 13 if you received a discharge under Chapter 7 in a case filed within the last four years. However, sometimes a debtor might file a 13 even if they aren’t eligible for a Discharge in the case (such as to cure mortgage arrears).

A debtor may choose to file a Chapter 13 from the beginning of the case or a debtor can covert to Chapter 13 from Chapter 7 (if they are eligible to be a debtor in Chapter 13).  Sometimes a debtor will file a 7 and things will get a uncomfortable in that 7 (such as the Trustee going after assets that the debtor thought might have been protected).  Chapter 13 can be viewed as a little bit of an escape hatch from the liquidation of certain assets that a debtor might be facing in Chapter 7.  Other times, a debtor in Chapter 13 might choose to convert to Chapter 7 (assuming the debtor is eligible for Chapter 7 and that the case had not been previously converted to a 7). As a lawyer who practices consumer bankruptcy I absolutely love Chapter 13. It can provide incredible relief to good people who are struggling with debt while at the same time protecting their assets (whether exempt or not). In my opinion, Chapter 13 is the best part of the Bankruptcy Code when looking for relief for normal people.

 

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