Chapter 13 bankruptcy can be complicated and confusing. But it doesn’t have to be. There 
are many benefits to Chapter 13 Bankruptcy that are not always immediately obvious. Do you know what these benefits are?
Chapter 13 bankruptcy is considered a “reorganization.” This is is different than Chapter 7 bankruptcy which is typically called a “liquidation.” Under Chapter 7, most of a debtor’s unsecured debts are eliminated in just a few months. While Chapter 13 does allow for debts to be discharged, this is not the main goal. The main goal is to reorganize.
Unlike a fast Chapter 7 bankruptcy, Chapter 13 will last anywhere from three to five years. During that time, a debtor is under the protection of the bankruptcy court. The debtor can not be sued for pre-petition debts, and collection activity from those pre-petition debts must stop. This is great because it provides a long period of “breathing room” for the debtor to figure out their financial situation.
During the life of the Chapter 13 case, the debtor will make monthly payments to the Bankruptcy Trustee. The Trustee then distributes funds to creditors according to the Chapter 13 plan. The Chapter 13 plan is proposed by the debtor and his or her attorney. If the math makes sense and creditors do not object, the Court will enforce the debtor’s payment plan.
Depending on the Chapter 13 plan, some percentage of a person’s debt will be paid during the bankruptcy. It might be 1% or it might be 100% — or anywhere in between.
Calculating a Chapter 13 plan is very complicated. Most people contemplating Chapter 13 want to know what their plan would be. I have some basic guidelines that allow me to “ballpark” a plan payment. But really dialing in the plan requires the completion of all of a debtor’s bankruptcy paperwork. A lot of work indeed!
Because Chapter 13 is intended to allow a debtor to reorganize, it can do things such as pay delinquent IRS taxes without the constant threat of enforcement by the IRS. It can also allow a person to make up an arrearage on a house or other secured loan (such as car loans). A debtor can not do these things in a Chapter 7 case.
Chapter 13 is also great for debtors that can not qualify for Chapter 7. The typical reasons a person will not qualify for Chapter 7 are because their income is too high or because they have too much assets. Most of my clients do not run into asset problems when trying to qualify for Chapter 7. However, when it does come up, it is usually because of equity in a debtor’s home.
This is just a brief overview of Chapter 13. There are many more benefits — some quite complicated — that I intend to discuss in the future. Stay tuned!
If you have any questions about Chapter 13 Bankruptcy in Sacramento, please call my office. I can be reached at (916) 333-2222.