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Often, when we think about bankruptcy, we picture someone getting all of their assets repossessed. However, that’s only on form of bankruptcy, Chapter 7. This article will cover Chapter 13 bankruptcy, which allows you to keep your assets and pay off your debts through a repayment plan. Read on to learn more about how Chapter 13 works.
You’ll create the repayment plan
The hallmark of Chapter 13 bankruptcy is the repayment plan. In this case, rather than liquidating your assets, the court allows you the opportunity to repay some of your debts through a repayment plan. Here’s an overview of how it works:
As part of the bankruptcy stipulations, you’ll be required to attend credit counseling. During your counseling sessions, you’ll work with your counselor to create a repayment plan that is feasible with the amount of disposable income that you have available to you.
Since most plans allow previsions for you to pay less than the total amount that you owe, the court must confirm that the plan is acceptable. Your creditors also have the opportunity to object to the plan. If the plan is found to be unacceptable, you must modify it, accordingly.
Once the plan has been accepted by the court, you’ll be responsible for making payments to a trustee, who will then distribute those payments to your creditors on your behalf.
You’ll (probably) get to keep your home
One of the major benefits of Chapter 13 bankruptcy over Chapter 7 is that you’ll likely get to keep your assets, especially your home. However, the big caveat to this is that you must stay current on your mortgage payments in addition to making the payments on your repayment plan.
The reality is that Chapter 13 bankruptcy only puts a temporary stay on foreclosure proceedings. That stay is effective for as long as you continue to conform to all of the plan’s requirements. If you miss a mortgage payment or stop making payments toward your repayment plan, the stay is liftted and your creditors have the right to collect on your debts.
There are 3 types of debt you can repay
You already read above that you’ll probably be allowed to pay less than the total amount that you owe. However, not all debt is created equal and not all debt can be forgiven. There are three kinds of debt that are considered in bankruptcy and they are as follows:
Priority debt: Any priority debts that you have must be paid in full. These include debts that are exempt from being forgiven such as taxes, child support payments, or student loans.
Secured debt: Secured debts are things like your mortgage or a car loan, anything that can repossessed as collateral. Again, if you want to keep these items, you’ll have to keep up with current payments and your repayment plan will likely cover any missed payments as well.
Unsecured debt: Unsecured debt is usually made up of things like credit card debt or medical bills. While you’ll likely have to pay a portion, this type of debt is the most flexible and some may be forgiven. In this case, it’s up to the court to decide how much you can afford to pay.
The process lasts 3-5 yearss
Another thing that sets Chapter 13 bankruptcy apart from Chapter 7 is that the process takes much longer. While Chapter 7 usually takes around six months to complete, you can expect to be on your Chapter 13 repayment plan for 3-5 years. That said, you can get the court to discharge it earlier if you’re able to repay your debts earlier.
The effects of the bankruptcy, however, will only stay on your credit report for seven years as opposed to the ten years faced by those who file for Chapter 7.