Chapter 13 is a type of bankruptcy in which a debtor offers to pay his or her net projected disposable income for a period of 3-5 years. Most debtors file for Chapter 7 bankruptcy relief but many do not understand the benefits of a Chapter 13 bankruptcy.
Chapter 13 bankruptcy allows more flexibility for debtors. Debtors are in control of their property and their estate. In a Chapter 7 bankruptcy, a bankruptcy trustee is appointed whose job is to attempt to liquidate assets for the benefit of credits. Chapter 7 is not a great option for those with operating businesses, questionable asset values, or non-exempt assets. If there is any risk to losing control of a business, having property sold, having exemptions objected to or having financial records carefully scrutinized, then Chapter 13 is a better route to take. To be fair, there is a Chapter 13 trustee in Chapter 13 who can also review the debtor’s records and can also object to exemptions but there is not the same push to liquidate assets as in Chapter 7
A debtor files a Chapter 13 plan with the bankruptcy court and makes payments to the Chapter 13 Trustee, based upon ability to pay. There is no requirement that unsecured creditors be paid anything in a Chapter 13. In many cases, all of the funds paid in go to pay secured claims (such as mortgage arrears) and priority claims (such as taxes). General unsecured creditors like credit cards and medical bills get the leftovers, usually a small percentage on the dollar. Unsecured debts stop accruing interest during the life of the plan.
Whereas most Chapter 7 cases are filed to get a quick discharge of general unsecured debt such as credit cards, lawsuits, old taxes, and medical bills, most Chapter 13 cases are filed to allow debtors to avoid foreclosure and come up with a plan to get caught up with the mortgage company, to avoid the repossession of a vehicle and restructure the car loan, to pay priority tax claims over time with no more interest accruing and eliminating penalties. Some Chapter 13 cases are filed because a debtor does not quality for Chapter 7 because he or she fails the means test. There are means tests in both Chapters 7 and 13 but failing to pass a Chapter 7 means can result in the dismissal of the case whereas failing to pass a Chapter 13 means test usually results in having to make a larger monthly plan payment.
Chapter 13 is also called the “wage earner” bankruptcy as it requires that a debtor have a steady source of income, such as wages, self-employment income, unemployment income, or social security income, to be eligible. A debtor is in a Chapter 13 for 3-5 years and things can change. Chapter 13 is flexible to allow for changes in income, divorce, and even death. There are a variety of tools available for Contra Costa County bankruptcy attorneys like David A. Arietta to help clients navigate a Chapter 13. A discharge is not entered until after the debtor has made his or her last plan payment. If the case is dismissed before the final payment is made and discharge entered, the debtor is again liable for all of the pre-petition debts and creditors can start collecting on those debts again. David protects his clients until the discharge is entered.
Call David A. Arietta at (925) 472-8000 to go over questions about Chapter 13.