The Wage-Earner's Plan: Advantages of Chapter 13 Bankruptcy

Sometimes debts can overtake even someone lucky enough to keep a job in this economy. If you find your paycheck doesn't stretch to cover all your obligations and you are worried about losing your house or car, Chapter 13 reorganization may be the bankruptcy type best for you.

Under Chapter 13 (of the U.S. Bankruptcy Code), an eligible debtor normally gets to keep his or her property and sets up an approved three-to-five-year repayment plan.

Eligibility

Chapter 13 is only available to individuals (or married couples) with regular income whose total debt does not exceed a set amount. The debt-ceiling amount is modified periodically, but most middle-income individuals qualify. Usually debtors will have to show proof of credit counseling and certain people who had bankruptcies recently dismissed are ineligible.

What to Expect

Filing a petition for Chapter 13 bankruptcy with the federal bankruptcy court triggers the "automatic stay," meaning that almost all creditors must stop attempting to collect debts owed by the petitioner. The stay is broad and halts most creditor lawsuits, collection actions and efforts to contact the debtor.

The debtor must provide with the petition all relevant information required by law about income, assets, expenses and debts. Within two weeks of filing the petition, the debtor must submit his or her proposed repayment plan.

The court appoints a neutral trustee who acts as the administrator and holds a meeting with the debtor and creditors. This meeting provides a chance for the trustee and creditors to ask the debtor questions under oath. All of these parties may attend a court confirmation hearing on the proposed repayment plan during which the judge decides if the plan is legally and practically acceptable.

A few types of debts cannot be discharged, like most student loans. The Chapter 13 petitioner also may not accrue any new financial obligations while the plan is in effect unless the trustee approves them.

Advantages

The automatic stay gives the debtor some breathing room to regroup and rethink how to best handle the debt load without continued creditor pressure. Once the repayment plan is approved, the trustee is a buffer between the debtor and his or her creditors, since payments are made to the trustee for distribution to creditors according to the plan terms.

If a strapped debtor is trying to save his or home, Chapter 13 provides a rare opportunity to stop a foreclosure proceeding and formulate a plan to make up past-due payments.

A few types of debt are dischargeable in Chapter 13 that are not in a Chapter 7 liquidation bankruptcy (the most likely alternative to Chapter 13) like money owed for intentionally harming someone's property.

This is a brief, simplified overview of Chapter 13. If you face overwhelming debt, be sure to discuss your situation in detail with an experienced bankruptcy attorney to learn about your options.