A Chapter 13 bankruptcy is often described as a reorganization bankruptcy for individuals. It is frequently used to provide an individual (or married couple) the opportunity to repay certain specific creditors, such as mortgage companies, over time. By utilizing Chapter 13, you could save your home from foreclosure by repaying mortgage arrears that have accrued on your account. You could repay the mortgage arrears over a three to five year period and retain your home. Chapter 13 can be used to save real estate, automobiles and other secured collateral or can be used to repay special types of debts, such as back taxes or judgment liens. Chapter 13 can also be used when you do not otherwise qualify for Chapter 7 relief.
Sometimes an individual does not qualify for Chapter 7 because his or her household income is too high or because the filing of a Chapter 7 will put that individual’s assets at risk. There are also situations in which an individual may have special types of debt that cannot be discharged in bankruptcy. Under these less common situations, a Chapter 13 filing may be the right solution.
In a Chapter 13 bankruptcy case, you will file a Chapter 13 Plan with the United States Bankruptcy Court, setting forth a proposal for dealing with your creditors. The plan you propose will be specific to your unique set of circumstances. Depending on your specific financial situation, you may propose to repay your unsecured creditors as much as 100% of the amount owed or as little as 5% of the amount owed. Your plan will provide that you will make monthly payments to a Chapter 13 Trustee, who will then disburse payments to your creditors. Although Chapter 13 allows a certain amount of flexibility, your plan must comply with the requirements of the United States Bankruptcy Code. Your plan must provide that your creditors will receive as much in your Chapter 13 case as they would have received in a Chapter 7 case. Your creditors and the Chapter 13 Trustee will have an opportunity to object to your plan if they believe that you are not acting in good faith or if your plan is not feasible. Often such objections are resolved by making certain changes to your plan.
Your plan is not binding on your creditors until it is confirmed (approved) by the Bankruptcy Court. The Court will schedule a formal hearing called a Confirmation Hearing and if the plan is approved, the Court will enter an order confirming the plan. At that point, your plan is legally binding on all of your creditors.