Chapter 13

Chapter 13 is a type of bankruptcy that allows for the reorganization of debts for individuals and small businesses. Corporations cannot file for Chapter 13 bankruptcy relief. In most cases, individuals and couples with some source of regular income are allowed to keep their property and pay a percentage of their debts over time. The most important benefit is that it often protects a home from foreclosure or a car from repossession. In addition, small business owners are allowed to operate and reorganize their debts without having to close their business.

An individual, even if self-employed, is eligible for chapter 13 relief as long as the individual’s non-contingent, liquidated unsecured debts are less than approximately $380,000 and secured debts are less than approximately $1,100,000. Those amounts are indexed for inflation and change periodically.

A Chapter 13 generally gives a debtor a three to five year period to make installment payments to repay credit obligations. The debtor proposes Chapter 13 plan which will be administered by a Chapter 13 Trustee. The plan specifies a repayment schedule that covers both secured and unsecured debt. Rather than making payments directly to creditors, a debtor makes payments to the Chapter 13 Trustee who then distributes it to the creditors according to the terms of the Plan. A Chapter 13 filing requires that a debtor have a verifiable source of regular income. An individual often files a Chapter 13 when they either have too many assets or too much income to qualify for a Chapter 7 or when they have debts that would not be dischargeable under a Chapter 7, such as recent tax obligations or child support payments. It is also a common solution for individuals who are behind on mortgage payments or are facing a foreclosure because they can cure the default over the three to five year plan period or propose some other solution like the sale of the property.

Businesses can also utilize the benefits of a Chapter 13 bankruptcy. The business may not want to stop operations and file for Chapter 7 bankruptcy relief. A Chapter 11 bankruptcy may be too costly and risky. A Chapter 13 reorganization can give the business the benefits of the automatic stay while it seeks to reorganize its debts. Leases can be assumed or rejected. Tax claims can be paid over time without further interest accruing and penalties may be discharged. General trade creditors can be paid a portion of what is owed. Chapter 13 provides an efficient and cost-effective framework for businesses.

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