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What happens in a Chapter 13 bankruptcy?

As noted in our last post, the federal Bankruptcy Code provides two types of bankruptcy procedures that are often used by individuals to eliminate or reduce their indebtedness. We summarized the steps in a Chapter 7 bankruptcy, the procedure that is used to eliminate debt through the sale of the debtor's non-exempt property and making partial payments to creditors. At the conclusion of a chapter 7 proceeding, the unpaid portions of all non-secured debts are discharged.

A Chapter 13 proceeding is used by individuals who want to gain additional time to pay their debts without going through the drastic procedures of Chapter 7.

A Chapter 13 bankruptcy is often called a "wage earner bankruptcy" because the debtor must have a regular source of income to qualify for the protections of Chapter 13. The biggest difference between Chapter 7 and Chapter 13 bankruptcies is that in Chapter 13, the debtor agrees to pay off outstanding indebtedness over time instead of having the debts eliminated.

Immediately upon the filing of the Chapter 13 petition, the automatic stay goes into effect; the automatic stay is a court order that prohibits all of the debtor's creditors from taking any action to collect what they are owed. The debtor is then required to submit a plan of payment to the bankruptcy court specifying how much will be paid on each existing debt during the repayment period, which is usually three to five years, depending upon the debtor's income and the nature and size of the outstanding debts. The principal advantage of a Chapter 13 proceeding is the ability of the debtor to keep important assets, such as a residence or automobile, while repaying the delinquencies on these loans. The debtor must make regular reports to the court or the bankruptcy trustee concerning payments made under the repayment plan.

A Chapter 13 plan of repayment can help reduce or eliminate debts such as second mortgages on property where the debt exceeds the value of the property. Payments on automobile loans may also be reduced during the repayment period. A knowledgeable bankruptcy attorney can provide assistance in filing the petition and preparing the plan of repayment.

Source: New York City Bar Legal Referral Service, "Chapter 13 Bankruptcy," accessed on Oct. 9, 2017

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