Chapter 13 Bankruptcy

Chapter 13 Bankruptcy or “Debt Consolidation”

Chapter 13 bankruptcy is a debt solution that can allow you to reduce or manage the debts you have accrued. As with a chapter 7 bankruptcy, it is damaging to your credit rating and credit report, but there are many cases when chapter 13 would be the right solution.

Chapter 13 bankruptcy is commonly used when you have significant equity in a home or other property. You also have regular income but the debt has become excessive and you cannot manage to make all your payments. You must have disposable income that will cover the payment plan as determined by the bankruptcy court. If you don’t have disposable income, you will not be able to file a chapter 13 bankruptcy.

The advantages in filing chapter 13 over a chapter 7 bankruptcy are that you have an opportunity to save your home from foreclosure. You can stop foreclosure proceedings and may even remedy delinquencies on your mortgage account over time. It also allows you to reschedule other secured debts (other than your primary residence) over the life of the repayment plan, which could lower the payments. Chapter 13 may protect co-signers as well.

Basically Chapter 13 acts as a consolidation loan where the consumer makes a monthly payment to the bankruptcy trustee who distributes the payments to the creditors. You do not need to have contact with the creditors under the chapter 13 plan.

One common misunderstanding about chapter 13 bankruptcy is that the entire debt must be repaid, and this is not the case. However, many lawyers would agree that this type of bankruptcy is far easier in bankruptcy court, and individuals are under far less scrutiny than in a chapter 7 bankruptcy, which essentially dismisses all debts. However, in a very small percentage of cases, chapter 7 discharge is denied.

You should know that if you file a chapter 13 bankruptcy and your financial situation changes, such that you could not continue on your repayment plan, you can later convert to a chapter 7 bankruptcy.