Chapter 13 Bankruptcy Explained
In today's tough economic times, more and more people are finding that they need to file for bankruptcy. For individual filers, the most common types of filing are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 bankruptcy is complete bankruptcy where the courts will discharge most of the debts of an individual, giving them a clean start. Most debts are erased except for federal student loans and federal taxes, which in almost all cases cannot be discharged. Chapter 13 bankruptcy differs from Chapter 7 in several different ways and has different ramifications for the filer.
Chapter 13 bankruptcy allows individuals with a steady income flow to reorganize their debt payment. Many filers for chapter 13 have jobs, but for a variety of reasons have run into financial difficulty. Some Chapter 13 filers have had to declare bankruptcy because of serious medical conditions and high hospital bills. Others have made poor investments. Regardless, these individuals have fallen behind in paying their bills and financial obligations and are overwhelmed by the mounting stacks of bills that they may face. Filing for Chapter 13 bankruptcy does not discharge a person's debts completely like Chapter 7. Instead, the court approves a payment plan, making it easier for debtors to pay off their obligations. In essence, Chapter 13 bankruptcy is a consolidation loan by a trustee who is repaid and then disperses the money to creditors.
Chapter 13 bankruptcy has some advantages over Chapter 7. First of all, Chapter 13 bankruptcies stay on credit reports for seven years versus ten years with a Chapter 7 filing. This makes rehabilitating a credit rating easier, making it less trouble to apply for loans and making it more likely that an individual will be offered lower interest rates. Second, Chapter 13 bankruptcy is looked on as slightly more favorable than Chapter 7 because the individual filing for it has not had his debts completely discharged. Also, Chapter 13 presents homeowners with the chance to save their homes from foreclosure by stopping foreclosure proceedings as long as they pay their mortgage on time after filing for Chapter 13. Reorganization of debt may also increase the amount of time that a person has to pay off bills and loans.
The first step that a person wishing to file for Chapter 13 bankruptcy must do is to file a petition in federal court that tells the court of the person's intentions. After the petition has been accepted, a Chapter 13 filer must present a list of all debts, creditors, personal assets, income, expenses, financial history, and a plan for reorganization of debt. Amendments can be made to this list if needed. After the paperwork has been filed an individual will meet with a Chapter 13 Trustee or a judge if there are contested matters that need to be resolved. This meeting will occur one to three months after filing the petition for Chapter 13. At the meeting, creditors will be invited, although most likely not all will attend the hearing unless they are major creditors to whom the person owes a lot of money. During the meeting, the trustee will lay out the terms of the plan and ask the creditors if there are any objections. If there are, they can be negotiated. If not, then the bankruptcy will be approved. After the bankruptcy has been approved, a filer will repay their debts through the court trustee. Most debt plans span between thirty and sixty months. If payments are not made in a timely manner, the trustee has the power to dismiss the bankruptcy filing, eliminating all protection granted by Chapter 13 bankruptcy.
Bankruptcy should be avoided at all costs, but sometimes it cannot be avoided. It is important to be aware of the difference between the different types of bankruptcy to choose the one that best suits a person's financial situation.
