Bankruptcy — Chapter 13

A Chapter 13 bankruptcy, often referred to as a "wage-earner's plan", is a reorganization of your debt, and allows for full or partial repayment to your unsecured creditors over a period of time (usually three, and not more than five, years). Generally speaking, you are not expected to liquidate your assets in order to repay creditors.

Will I be allowed to keep all my assets?

You will be allowed to keep your assets so long as your Chapter 13 reorganization plan meets certain requirements.

You must be able to keep full payments current on any debts secured by an asset if you wish to keep that asset. You may, however, with the consent of the secured creditor, be allowed to repay any arrearage on such debts over the period of time specified by the Chapter 13 repayment schedule. Such a repayment plan can forestall and ultimately end foreclosure or repossession proceedings.

Your Chapter 13 repayment schedule may call for only a partial repayment to your unsecured creditors. The court must determine, however, that the portion repaid in this fashion will at least equal what these creditors would receive were you forced to (at least partially) repay them through a Chapter 7 bankruptcy liquidation.

How is the repayment amount determined?

You will be required to file an income and expense statement. Any surplus income after expenses will be assumed to be available for repayment to unsecured creditors through the Chapter 13 repayment plan. If you are proposing a partial repayment plan that meets the Chapter 7 alternative requirements explained above, you will still be expected to repay a minimum of 10% of your unsecured debt. If you show surplus income after expenses sufficient to repay a greater percentage of your unsecured debt, this may be required.

What happens to the unpaid portion of the unsecured debt?

If you successfully complete your Chapter 13 repayment plan, any remaining unpaid portion of the unsecured debt is discharged. If you cannot make the payments required by your Chapter 13 schedule, and the plan is not modified by the court, you may then be required to fall back on possible repayment through the liquidation process of Chapter 7 proceedings.

What are the advantages and disadvantages of Chapter 13?

The primary advantage of Chapter 13 bankruptcy is that you generally retain possession and control of your assets; you are not required to liquidate them. Additionally, you may be allowed more time to address the back payments due on secured debts. On your unsecured debts, you will pay most or all of what you owe at the time of your bankruptcy petition, since further interest accumulation ceases. You pay on the debt only what you can afford.

On the other hand, a notation of bankruptcy is the most negative information you can have on your credit record, and reestablishing credit thus may be difficult. In order to regain credit, you will have to work at it; you may find that you need to put up collateral and/or provide a credit-worthy cosigner in order to get started again. Additionally, there are some industries where bankruptcy is looked upon as a negative factor by those making decisions about hiring, promoting or retaining you. Moreover, bankruptcy may affect your ability to obtain an apartment if your landlord checks your credit record as part of a rental or lease application.

The above information should be understood to be a general discussion of the subject matter and DOES NOT constitute a legal opinion about the situation. For further information please consult a qualified attorney.

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