How Chapter 13 Works

Bankruptcy is an option many people turn to when their finances are stretched to the limit. Personal bankruptcy cases typically fall under Chapter 7 or Chapter 13, depending on the amount of your debts, income and assets. If you don't qualify for Chapter 7 or your want to retain your assets, filing Chapter 13 may help. Understanding how the process works and what benefits it offers can help you decide if it's right for you.

Function

• While Chapter 13 offers you relief from your debts, it functions very differently from Chapter 7. In a Chapter 13 bankruptcy, you keep your assets and commit your future income to repaying outstanding debts. Rather than erasing your debts completely, they are restructured according to their priority. With the consent of the court and your creditors, you agree to make regular monthly payments to your debts for three to five years.

Filing

• Chapter 13 petitions must be filed in the bankruptcy court closest to where you live. At the time you file, you are required to submit a complete list of your debts and assets, your current monthly expenses and income, a schedule of any executory contracts or unexpired leases and a statement of financial affairs. The U.S. Bankruptcy Code also requires you to complete certified credit counseling 180 days before filing. As of 2010, the filing fee for a Chapter 13 case is $274.

Repayment Plan

• At the core of a Chapter 13 case is your repayment plan. The plan must outline what amount you plan to pay each creditor per month, based on your income and expenses. You must begin making payments according to the plan with 30 days of filing your initial petition. Your creditors and the court must agree to the terms of your repayment plan.

Benefits

• Filing Chapter 13 can be beneficial in several ways. Filing a bankruptcy petition enacts an automatic stay against your creditors. If you are facing collection actions, including a lawsuit or a foreclosure, the automatic stay prevents your creditors from taking further action until the case is resolved. A Chapter 13 bankruptcy allows you to keep your property and other assets rather than liquidating them to repay creditors. Chapter 13 bankruptcy typically remains on your credit record for seven years, compared with 10 years for a Chapter 7 filing.

Considerations

• Before filing Chapter 13, you should consider the amount of your debts and your ability to make plan payments. As of 2010, you may have no more than $360,475 in unsecured debt and $1,081,400 in secured debt, according to U.S. Courts. You must also consider your current income and any future changes that may potentially affect your ability to pay. According to Time magazine, only 1 in 3 Chapter 13 cases is ever completed successfully. If you fail to make plan payments, creditors are free to resume collection actions against you.