Many people fear the term “bankruptcy” when it comes to debt. They imagine the worst-case scenario: being down and out and unable to pay their debts. Before you let it scare you, pause and breathe. Bankruptcy is not a scary buzzword but, instead, a viable option. 

If you or a loved one is in debt and are exploring options, you should be well informed no matter what strategy you choose. As a legitimate form of debt relief, bankruptcy can be considered depending on your circumstances. After all, filing for bankruptcy should not be taken lightly; rather, it should be a matter of having the knowledge needed to understand this serious financial decision.  

This article will cover one of the basics of bankruptcy: Chapter 13 bankruptcy—the Wage Earner’s Plan. 

Bankruptcy summarized  

Bankruptcy is a legal process supervised by the federal bankruptcy court that helps individuals and businesses pay off their debts. This process can be filed under several chapters designed for specific situations. Bankruptcy also protects against aggressive creditor actions, such as wage garnishments, lawsuits, and harassment.

It offers a fresh start for those overwhelmed by financial obligations while holding debtors accountable to a structured repayment plan. While this sounds ideal, it is not a complete solution that eliminates debt. Instead, it should be considered a feasible starting point. 

Chapter 13 bankruptcy 101  

Now that we have reviewed bankruptcy, we’ll answer the question: what is Chapter 13, and how does it work?

What is Chapter 13?

This chapter is a legal process for individuals or families with regular income. It allows them to develop a court-approved repayment plan to pay off all or a portion of their debts.

This option helps debtors make manageable installments to creditors over three to five years. Instead of sliding down the path to financial woes, anyone can work with a bankruptcy lawyer and the federal court to manage debt. The goal is to reorganize debt while protecting assets from foreclosure or repossession.  

So, how does Chapter 13 work? It starts with the most essential part—filing the necessary documents. 

How does filing for Chapter 13 bankruptcy work?

Filing for Chapter 13 begins with the debtor submitting a petition in bankruptcy court, which requires them to provide detailed financial documentation. Necessary documents include assets, liabilities, income, and living expenses, among others.

As part of the filing process, debtors must also complete a court-mandated credit counseling session. This session is designed to assess whether bankruptcy is the right option and to explore other potential repayment strategies. The certificate of completion from this session is another required document for filing.

After filing the petition, an automatic stay is triggered.

Wait, what is an automatic stay?

Under bankruptcy law, an automatic stay is a legal action that temporarily halts creditors from any collection action. This means creditors are not permitted to take legal measures such as foreclosing on a home, repossessing a car, or garnishing wages. For many, this is a lifeline that keeps things under control while they stabilize their finances.

Once the stay is in place, the debtor and an expert will propose a repayment plan (more on that in the next section), which requires court approval. After this, and if approved, the repayment plan kicks off.

How does Chapter 13 repayment work?

Repayment under this bankruptcy chapter follows a repayment plan from start to finish. The repayment plan in Chapter 13 bankruptcy is calculated based on factors such as the debtor’s income, expenses, adjustments for reasonable living expenses, and the types of debt they owe.

Within this, debt repayment is sorted depending on priority. Urgent debts (i.e., alimony, child support, etc.) must be fully repaid under the plan. Secured debts may require catching up on missed payments or paying the loan balance in full. Then comes unsecured debts, typically paid only a fraction of the amount owed, depending on the debtor’s disposable income after accounting for necessary expenses. 

The debtor makes monthly payments to a trustee, who then disburses the funds to creditors accordingly. This continues until the plan is completed, leading to the discharge of remaining eligible debts. 

What else should I know?

In addition to the above, an eligibility criterion must be met to file for Chapter 13 bankruptcy. Here are the requirements:

1. The combined debts must be less than $2,750,000 when filing. 
2. You cannot file for bankruptcy if a recent petition was dismissed in the past 6 months for missing court, ignoring orders, or withdrawing it amid creditor actions. 
3. You must have received credit counseling from an approved agency within the last six months, individually or in a group. However, there are exceptions for emergencies or a lack of available agencies.

If you don’t meet these requirements, don’t worry. There are plenty of debt relief options that exist and are readily available to learn about.

If you do, find the right Chapter 13 lawyer to guide you through the process (and pick up some essential Chapter 13 tips and tricks along the way). By understanding the intricacies of bankruptcy and working with experienced legal counsel, debtors can navigate the process more smoothly and emerge on a stronger note.

Comparisons between different chapters   

Bankruptcy is not a one-size-fits-all process but a detailed legal procedure that supports different types of dire financial needs. The most filed chapters—7, 11, and 13—serve unique needs and financial situations.

Chapter 7 vs. Chapter 13

Chapter 7 bankruptcy entails discharging eligible debts by liquidating and/or handing over assets. In contrast, Chapter 13 allows debtors to keep their assets while repaying debts gradually over time. 

Here’s where you need to be careful. Chapter 7 may be faster, typically taking only a few months to complete, but it’s limited to individuals who meet specific income requirements. On the other hand, Chapter 13 requires a longer commitment but provides greater flexibility for those with significant assets or higher incomes.

Chapter 11 vs. Chapter 13  

Chapter 11 bankruptcy is primarily for businesses, allowing them to continue operations while repaying creditors. However, it is also available to individuals with debts exceeding Chapter 13 limits. 

Wrapping up  

While Chapter 13 bankruptcy is a straightforward process, it can have long-lasting effects. Although it may provide individuals with the opportunity to organize their finances, it can also negatively impact their credit scores, which will need time to recover.  

But again, positive behavior will pay off later. Making consistent payments demonstrates financial responsibility and can encourage creditors to extend credit in the future. Before you set forth on any path, make sure to explore other options. Any long-term financial planning requires plenty of assessment and consulting with a professional.

– 

Disclaimer: The information provided in this article is for general informational purposes only and is not intended as legal, financial, or professional advice. Clarity Debt Resolution Inc. (“Clarity”) does not guarantee any specific outcomes, and results may vary based on individual circumstances. Clarity complies with all applicable laws, including the California Debt Settlement Services Act, and recommends consulting with an attorney or financial advisor before making any financial decisions. Clarity is not responsible for the accuracy of external links or content, and all website content is protected by copyright laws. We reserve the right to update or remove content at any time without notice.