Chapter 13 bankruptcy is one of the more commonly used bankruptcy chapters, behind Chapter 7. Unlike Chapter 7, Chapter 13 does not involve liquidation. Usually, a Chapter 13 debtor is permitted to keep all of his property, whether it is exempt or not, as long as the Chapter 13 plan complies with the law. Chapter 13 may also involve more expense than a Chapter 7 in terms of attorney's fees, as the process is more complicated and drawn out.
Chapter 7 is a comparatively brief process, which often lasts several months. On the other hand, Chapter 13 bankruptcy will last from 3 to 5 years! This lengthy time period is due to the fact that Chapter 13 involves regular monthly payments to the Chapter 13 trustee for the plan period. The plan period will vary from 3 to 5 years, depending upon whether your income is generally above or below the median income for your state of residence.
The Chapter 13 plan, or simply the payment plan, is how Chapter 13 works. Chapter 13 is an attempt to "reorganize" an individual's debt by paying certain creditors over a period of time. The debtor's income is analyzed by the means test, which determines the disposable income of the debtor. The disposable income will then be used to make the monthly plan payments. Depending upon the means test calculation, there may be no allocation at all to unsecured creditors, such as credit card companies and medical bills. However, the Chapter 13 plan must always pay priority claims, such as domestic support obligations, child support and tax debt.
The Chapter 13 plan must meet several tests in order for it to be confirmed or approved by the bankruptcy court. First, the plan must be proposed in good faith. This means, essentially, that the debtor intends to completely follow through on the plan and is not attempting to misrepresent his finances or perpetrate a fraud on the court. The plan must also meet the "best interest of creditors" test. This test requires that the Chapter 13 plan must pay unsecured creditors at least what they would have had under a Chapter 7 bankruptcy. In many cases, the unsecured creditors would have received nothing in Chapter 7, so this test can often be easily met. The other test is called the "best efforts" test. The best efforts test requires that the Chapter 13 plan pay unsecured creditors a certain amount multiplied by the debtor's disposable income.
Chapter 13 Trustee
Similar to the Chapter 7 trustee, the Chapter 13 trustee acts as the main point of contact for a debtor. The trustee will review the proposed payment plan of the debtor and has the ability to challenge the plan in bankruptcy court if he or she believes that it is improper. If the Chapter 13 plan is confirmed by the bankruptcy court, the trustee acts as an intermediary between the debtor and creditors receiving payments. Specifically, the debtor makes payments each month to the trustee. The trustee then divides up the payment, as established in the Chapter 13 plan, and issues payments to the creditors.
Restrictions During Chapter 13 Bankruptcy
Chapter 13 bankruptcy carries with it a few restrictions which are not present in Chapter 7 bankruptcy. Obviously, a debtor must continue to make your monthly plan payment. However, a debtor must not incur substantial debt without court approval, such as a car loan. The debtor must also maintain insurance on any collateral, such as a car that is collateral for a car loan.
Similar to a Chapter 7 bankruptcy, at the end of the plan, all of the debts of the debtor are discharged. Of course, this does not include non-dischargeable debts, such as certain taxes and domestic support obligations. As in Chapter 7, the Chapter 13 discharge is personal, meaning that if there is someone who is also obligated on one of the discharged debts, he or she is still liable for the debt.