About Chapter 13
A chapter 13 bankruptcy is akin to a payment plan. The debtor gets the first crack at putting together a plan of repayment. The plan essentially is a budget and uses bankruptcy form 22C (which is very similar to the means test used in the Chapter 7 context). This form kicks out a final number after all monthly expenses which is called the Disposable Monthly Income. This amount is proposed as the monthly payment. A trustee is appointed who carefully examines the budget and objects where it appears too generous to the debtor. The trustee will try to ensure that the budget is austere. Chapter 13 bankruptcy permits a debtor who has successfully completed his or her Chapter 13 plan, to be granted a full discharge, which is broader than a Chapter 7 discharge.
Upon filing a Chapter 13 petition or within a specified period of time from the petition date, debtors must file a plan for the adjustment or repayment of his or her debts. Debts of any kind may be dealt with in a Chapter 13 plan, including nondischargeable debts. The debtor must usually apply all of his or her disposable income for the period of the plan toward the making of payments under the plan. The debtor is expected to begin making these regular plan payments to the Chapter 13 trustee within 30 days after the plan is filed. The chapter 13 trustee collects the debtor’s payments and pays the expenses of administering the plan, any unpaid portion of the fee allowed to the debtor’s attorney, and the creditors as provided in the plan. The payment to the creditors can be as much as 100% to as little as zero percent. It depends on the type of debt, the monthly income, the length of the plan, and amount of creditors.
During the pendency of the case, most creditor actions against the debtor and the debtor’s property are stayed. A debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not justly be held accountable, may be granted a partial Chapter 13 discharge. Otherwise, an unsuccessful Chapter 13 case may be either dismissed or converted to Chapter 7 (provided the debtor qualifies for a Chapter 7 discharge).
Many clients shrink from Chapter 13 because of the payment plan. They not unreasonably prefer to simply get the bankruptcy over with in the few months the process takes. However, there are a lot of sound reasons for the chapter 13. The reaffirmation process can be avoided in the chapter 13 process. In other words by making payments through the plan, should it become impossible to pay the car, the debtor can convert the 13 to the chapter 7 and discharge the deficiency on the car. This is a much better result than the reaffirmation blowing up in the chapter 7 context. Also, taxes are often not dischargeable in a chapter 7. However, the chapter 13 allows the debtor the ability to repay these non-dischargeable taxes. The most common advantage is repayment of arrears on your personal residence. Another advantage is that willful and malicious injury to property will not be discharged in a chapter 7, but may be in a chapter 13. More, you can reclaim repossessed property in a chapter 13. Another advantage is that you can repay your loans against your 401(k) and are not part of your disposable monthly income.