How Chapter 13 Bankruptcy Works

A Chapter 13 bankruptcy filing consists of a reorganization or repayment plan in which the debtor makes payments to a trustee over a three- to five-year time period.

Why People File Chapter 13

Most Chapter 13 cases are filed for debtors who are attempting to stop a foreclosure of their home or the repossession of their vehicle.

Some Chapter 13 cases are filed because the debtors are ineligible for Chapter 7, either because they filed a Chapter 7 sometime in the previous eight years, because they make too much money or have too many assets, or because they could pay their creditors a decent percentage of what they owe (they did not pass the means test).

Some clients will file a Chapter 13 repayment plan even if they qualify for Chapter 7. This could be because they want to pay their creditors and will be able to afford to do so as a result of the bankruptcy process. In other cases, clients use Chapter 13 to fulfill unpaid child support, tax debt and mortgage payments.

The Advantages Of Filing Chapter 13 Bankruptcy

Here is a general summary of the benefits of a Chapter 13 filing:

  • You can get your house and car payments up to date over the life of the plan.
  • Your overdue alimony and child support can be stretched out and paid off over three to five years.
  • You can reduce payments on some secured loans to the value of the collateral. For example, if you owe $5,000 in car payments and the vehicle is worth only $2,000, then you only pay the $2,000.
  • You get to keep all your personal possessions.
  • You can get some bankruptcy relief even though you received a discharge in a prior Chapter 7 filing.
  • You can protect a co-signer from creditor harassment by proposing to pay the co-signed debt over the life of the plan.
  • You can pay your taxes over time, possibly, without interest or penalties.

However, if your federal tax obligations are more than $10,000 and the only source of unmanageable debt, an offer in compromise might be the better route and we can help with this as well.

Disadvantages Of Filing Chapter 13

The one obvious disadvantage of a Chapter 13 filing is that it takes at least three years to complete. During this time:

  • You may feel like you’re on a leash … because you are.
  • You’ll have to give up your income tax refunds for the years you are in a Chapter 13.
  • You’d lose any unexpected windfalls to the trustee.
  • You won’t be allowed to incur any more debts without the trustee’s consent.
  • You risk dismissal of your case should you lose your job and be unable to maintain payments.
  • You may risk losing your homestead exemption if you move or sell your home.

A word of caution. Two-thirds of Chapter 13 plans fail and then the bankruptcy protections disappear. Debt collectors are back at your door, and in hopes of obtaining some repayment, they could even force you into a Chapter 7 filing.

Contact Us To Learn More

Call 630-912-5970 or contact our law office online to learn more about bankruptcy and other debt relief options. We maintain offices in Itasca, Rosemont, Algonquin and Naperville for our clients’ convenience.