Though Chapter 7 or liquidation bankruptcy is the bankruptcy chapter most commonly applied for by individuals to save themselves from overwhelming debts, this would not be the right chapter for those who fail the means test (this test determines if an applicant’s salary is within the limit set under this specific chapter). Another chapter, however, may be right for them: Bankruptcy Chapter 13.
Chapter 13 of the U.S. Bankruptcy code, otherwise known as Wage-earner’s Plan, Repayment Plan, or Debt Adjustment, is a reorganization or restructuring type of bankruptcy that allows debtors to propose a three-year payment plan through which they may settle all their debts (with the permission of the court, this plan can be extended up to five years).
The restructured payment scheme is intended to make debt payments more affordable for debtors; this method also no longer requires the debtor to surrender any of his/her assets and properties for selling. For those who run a business, specifically sole proprietors, they can continue operations and earn profits, which they can use to pay off their debts.
Debtors, who voluntarily file Chapter 13 bankruptcy, are protected by the “automatic stay,” a court order that stops creditors and collectors from making any attempt to ask debtors for payment. This means cessation of all phone calls, emails, text messages, letters, lawsuits, attempts to foreclose or repossess any of the debtor’s assets and properties, as well as prohibition from petitioning the court to levy a debtor’s bank account or have a part or all of his/her wages garnished.
Besides the automatic stay, chapter 13 bankruptcy has other benefits, including the possible reduction of the loan amount itself (from the value of the principal loan down to the market value of the loan collateral) and the discharge of some debts, which would be retained had the debtor applied for chapter 7 instead. Among those considered as dischargeable debts are penalties and fines payable to the government (except criminal fines), retirement account loans, debts that were denied discharge during a prior filing of bankruptcy, debts resulting from divorce or separation proceedings, debts incurred due to payment of non-dischargeable tax obligations (such as the debts acquired from the use of credit card in paying taxes), debts resulting from the willful and malicious damaging of someone else’s property (this does not include personal injury cases), and condominium or homeowners association (HOA) dues (these dues, however, have a lien on a debtor’s property. This means that, despite the discharge, the debtor can still lose his/her property; thus, it is imperative that these dues be paid continuously).
Filing chapter 13 bankruptcy and understanding fully well its advantages and possible consequences can definitely be better with the help of an exceptional bankruptcy lawyer. Chapter 13 also allows you to:
- Propose a repayment plan that works for you:
- Save your home from foreclosure;
- Reschedule your secured debts;
- Make a single payment; and
- Stop harassment from creditors.