Is Chapter 13 Right for Me?

In the United States, individuals seeking bankruptcy protection have several options under the United States Bankruptcy Code. Chapter 13 bankruptcy is one common bankruptcy option named for the eponymous section of the Bankruptcy Code. Bankruptcies under Chapter 13 are reorganization bankruptcies and involve the development of a plan to repay creditors.

Basics

• Indebted individuals may file for Chapter 13 bankruptcy; they may not be forced into bankruptcy under this Bankruptcy Code chapter by creditors. The debtor then submits a plan to repay the creditors during a period of between three and five years. The bankruptcy plan proposed by the debtor may be modified by creditors or by the bankruptcy court. The plan may modify the characteristics and terms of the debt. If the debtor fails to follow through on the repayment plan, they may be forced into a liquidation bankruptcy.

Specifics of Chapter 13

• Not all individuals are eligible for a bankruptcy under Chapter 13. Most importantly, debtors must have sufficient disposable income to be able to develop a viable plan to repay creditors. In addition, there are debt ceilings. Debtors with extremely high secured or unsecured debts may be ineligible to file under this chapter. A Chapter 13 bankruptcy stays on the creditor history of the debtor for a period of 10 years, commencing on the date the bankruptcy is filed.

Alternatives

• Individuals unable to sufficiently repay debts through a Chapter 13 reorganization bankruptcy will typically need to file for a liquidation bankruptcy. Liquidations for individuals fall under Chapter 7 of the Bankruptcy Code. The most common alternative to these options is a direct negotiation with creditors. To avoid the time and cost involved with bankruptcy and collection proceedings, many creditors are willing to expunge debts in exchange for a partial settlement. This is typically most effective when the debtor has a small number of creditors.

Chapter 7 Bankruptcy

• A liquidation bankruptcy under Chapter 7 involves the sale of the debtor's personal assets by a trustee appointed by the bankruptcy court. Typically, the debtor may exempt certain personal assets. These personal assets vary from state to state but generally consist of a first personal residence, a vehicle and personal effects of minimal salable value. The proceeds from the sale of the debtor's assets are used to pay creditors, who have no further claim against the debtor. Chapter 7 is often called a "fresh start" bankruptcy.

Business Owners

• Individuals who own businesses should carefully consider whether a Chapter 13 or Chapter 7 bankruptcy is more appropriate. If the business possesses a salable value, the debtor's equity interest may be repossessed and sold during a liquidation bankruptcy. Alternatively, the irregular cash flows provided by a business may make it more difficult for the debtor to adhere to the repayment schedule of a reorganization bankruptcy. If the business, as well as the owner, is insolvent, the business may need to file for a liquidation bankruptcy under Chapter 7 or a reorganization bankruptcy under Chapter 11.