A Guide to Filing for Bankruptcy: Chapter 13 Bankruptcy Explained

Bankruptcy may sound scary and conjure visions of being penniless. In reality, it’s a legal process that can relieve debt woes and help you get back on your feet. Chapter 13 is a type of bankruptcy that allows you to pay off your debts that have overwhelmed your bank account over a longer period.

Unlike liquidating your assets or other more extreme measures, declaring Chapter 13 bankruptcy allows you to still pay off your debt. It can also stop foreclosure on your home which makes it a particularly popular type of bankruptcy for homeowners. If you need a plan to handle overwhelming debt, here is chapter 13 bankruptcy explained.

Who is Eligible for Chapter 13?

To be eligible to file for Chapter 13, your unsecured debt such as credit cards, personal loans and medical bills, must not total more than $420,000. The limit on secured debt, most commonly a mortgage or auto loan, is capped at approximately $1.3 million. If your debt exceeds these amounts, then Chapter 13 may not be for you. However, if you’re looking for a way to buy more time to pay off your debts, then Chapter 13 is ideal if done right.

The Difference Between Chapter 13 and Chapter 7

The pros and cons of Chapter 13 versus Chapter 7 are often dependent on the person’s situation. Chapter 13 is often called “the wage earner’s plan.” While Chapter 7 is the process of liquidating nonexempt assets and giving whatever proceeds are earned to creditors whereupon the debt is then discharged, Chapter 13 provides a reprieve from a lack of cash flow and time. In other words, in Chapter 13 bankruptcy, you still pay your creditors back but the process is fulfilled through a plan administered as part of the declaration. Plans usually range from three to five years where you agree to make a certain number of installment payments until your debt is paid off. Chapter 13 is ideal for people who have income but can’t pay out what they owe all at once when the debt collectors are calling.

The First Steps of Chapter 13 Bankruptcy Explained

The first steps of initiating Chapter 13 bankruptcy is filing a petition with the court and submitting a list of assets and liabilities, current income and expenditures, an executory contract and a Statement of Financial Affairs—an official bankruptcy form provided by the court. There is other paperwork, statements and forms that must be filed with the court to initiate Chapter 13 proceedings, and separate court fees.

While some debtors may prefer to go through the process themselves, it’s very complicated and is best filed and negotiated by an attorney. Some firms specialize specifically in bankruptcy cases and can provide the best advice if you’re considering filing.

Using Chapter 13 to Manage Debt That Can’t Be Discharged

Chapter 7 bankruptcy liquidates your assets. Your nonexempt property is sold and the proceeds are distributed to creditors and you are then free of those debts. While this may seem like an appealing outcome to some people, especially those without many nonexempt assets to liquidate, the downside is that some debts are ineligible to be discharged.

• Student Loans: One of the most common types of debt that creates extreme hardship is student loans. As of 2021, Americans currently owe a total of $1.73 trillion in student loans. Both Chapter 7 and Chapter 13 bankruptcy do not treat student loan debt the same way as other types of debt, such as credit cards, medical bills or loans. The benefit of Chapter 13 bankruptcy explained, however, is that because this type of bankruptcy rearranges how you pay off your debt and is structured as a plan. You keep your assets but devote a certain portion of your income to repaying debts over a specified period of time. This can allow some relief of student loan payments if they’re exorbitantly high and may benefit people who are struggling with student loan repayment.
• Most Income Tax: If you owe the IRS for unpaid back taxes, there are strict regulations for some of the debt that might be discharged. Most of it is not eligible for discharge under Chapter 7 or Chapter 13. However, the benefit of using Chapter 13 is that most state or federal back taxes you owe can be included in the three to five-year plan that comes with it.
• Alimony and Child Support: These obligations are considered non-dischargeable debt and will not go away under Chapter 7. However, Chapter 13 will roll past-due alimony and child support payments into your monthly payment plan for your debt. This makes the becoming current on these types of payments more manageable since the process is spread over three to five years, one of the benefits of Chapter 13 bankruptcy explained.

Reaching Your Goal to be Debt Free

Bankruptcy may sound like a curse, but it can also be a blessing and help you get back on your feet. If you’re overwhelmed with debt but have income and simply can’t pay it off in the time creditors are demanding, it’s time to reassess your approach. Chapter 13 is a better option with major upsides, such as preventing foreclosure on a home by granting you more time to pay what you can’t afford to in a short time. Debt can snowball and be overwhelming, but with the right legal guidance, you can find a plan that works for you.

Van Horn Law Group has many years of experience and success with bankruptcy cases they’ve handled. They also offer a free consultation where an attorney will assess your unique financial situation and offer options to you. Working with a firm that specifically handles bankruptcy cases is the way to go to get the best outcome out of filing for bankruptcy possible. As long as you have the proper legal guidance, you will be able to negotiate a reasonable plan with creditors through a Chapter 13 hearing to eliminate your debt.